At the start of January 2019, Bahrain launched a 5 per cent value-added tax (VAT), following Saudi Arabia and the UAE, both of which did the same in January 2018.
Consumers often assume that retailers will simply increase their prices by 5 per cent, passing the tax in its entirety on to consumers. Accordingly, they conclude that VAT constitutes a redistribution of income from consumers to the government and that the ability of sellers to set prices means that they can evade any ill effects. But is that actually what happens?
Consider a simplified economy where retailers import goods from abroad, employ locals, and resell the imported goods to the locals, who pay for the goods using the wages they earned from working at the retailers. Now imagine that the government imposes 5 per cent VAT on those goods, and that wages remain unchanged.
Will the retailers simply increase prices by 5 per cent? If that happens, while wages remain fixed, then the locals will not be able to purchase as much as they used to, as prices have increased.
When consumers purchase smaller quantities of goods, retailers have two options: maintain prices and simply suffer lower sales; or consider lowering prices a little, to soften the impact on sales, albeit earning a smaller amount on each unit sold. In most cases, they will take the latter option, as it implies higher profits than simply raising prices by 5 per cent and selling fewer units. In extreme cases, they may even leave prices unchanged, preferring to maintain sales, but at a lower profit per unit.
Whenever retailers choose to increase their price by less than 5 per cent, they are sharing the burden of the tax. The smaller the price increase, the greater the burden that they are bearing and if they freeze prices at their original level, then they are effectively paying the tax completely on behalf of consumers.
What determines how much prices actually rise and, therefore, how much of the tax burden is borne by consumers rather than retailers? It is the sensitivity of demand to prices, a concept that economists formally refer to as the “price elasticity of demand”.
If demand is very sensitive to prices, known as demand being highly “elastic”, then retailers will be very reluctant to increase prices despite the tax, because demand will decrease by a large amount, and their sales will decline dramatically. Under these circumstances, they will prefer to raise prices by a small amount only, bearing the most of the burden of the tax.
A good example of this is fast food. Fast-food demand is very price-sensitive because there are so many substitutes to fast food, both inside and outside the fast-food sector.
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After all, consumers always have the option of preparing food at home. Therefore, we should expect to see fast-food prices rise by less than 5 per cent after VAT is introduced, with consumers in that case barely feeling the effects of the tax.
In contrast, if demand is highly insensitive to prices, or highly “inelastic”, then retailers will readily increase prices because their sales will decline by only a small amount. That means consumers will bear almost all of the burden of VAT.
A good example of this is household water consumption. Household water consumption is insensitive to prices, because in many uses, there are no substitutes, and it is essential to life. Therefore, we should expect to see household water prices rise by almost the full 5 per cent after VAT is introduced, with consumers glaring angrily at their water bills as they bear almost the entire weight of the tax.
The millions of taxable goods and services that you can purchase in an economy vary diversely in the price sensitivity of demand, but we can say with certainty that there are many taxable goods and services that exhibit high levels of price sensitivity of demand. Therefore, retailers will inevitably face a significant burden of taxes such as VAT, and the increase in government revenues will not be exclusively funded by the higher prices paid by consumers.
In principle, if the government did want to introduce a tax, and to ensure that its burden was borne completely by a specific person or organisation, then it can use what is known as a “poll tax”. This is a tax that is levied directly on the desired individual/organisation. Governments have used this type of tax before but they are not very popular politically.
Instead, most prefer to tax activities such as consumption, income, inheritance, sales, imports and so on. When an activity is taxed, rather than an individual, then people will modify their behaviour in an effort to attenuate the tax’s impact upon them. As a result, it becomes virtually impossible to restrict the burden to a specific individual or organisation, and it will be shared according to the laws of demand and supply.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.
Specs
Engine: Dual-motor all-wheel-drive electric
Range: Up to 610km
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The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
THE SPECS
Engine: 6.75-litre twin-turbocharged V12 petrol engine
Power: 420kW
Torque: 780Nm
Transmission: 8-speed automatic
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The specs
Engine: 1.4-litre 4-cylinder turbo
Power: 180hp at 5,500rpm
Torque: 250Nm at 3,00rpm
Transmission: 5-speed sequential auto
Price: From Dh139,995
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MATCH INFO
World Cup qualifier
Thailand 2 (Dangda 26', Panya 51')
UAE 1 (Mabkhout 45 2')
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Living in...
This article is part of a guide on where to live in the UAE. Our reporters will profile some of the country’s most desirable districts, provide an estimate of rental prices and introduce you to some of the residents who call each area home.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
The years Ramadan fell in May
Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
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Moon Music
Artist: Coldplay
Label: Parlophone/Atlantic
Number of tracks: 10
Rating: 3/5
Test
Director: S Sashikanth
Cast: Nayanthara, Siddharth, Meera Jasmine, R Madhavan
Star rating: 2/5
New Zealand 57-0 South Africa
Tries: Rieko Ioane, Nehe Milner-Skudder (2), Scott Barrett, Brodie Retallick, Ofa Tu'ungfasi, Lima Sopoaga, Codie Taylor. Conversions: Beauden Barrett (7). Penalty: Beauden Barrett
The National Archives, Abu Dhabi
Founded over 50 years ago, the National Archives collects valuable historical material relating to the UAE, and is the oldest and richest archive relating to the Arabian Gulf.
Much of the material can be viewed on line at the Arabian Gulf Digital Archive - https://www.agda.ae/en
Western Clubs Champions League:
- Friday, Sep 8 - Abu Dhabi Harlequins v Bahrain
- Friday, Sep 15 – Kandy v Abu Dhabi Harlequins
- Friday, Sep 22 – Kandy v Bahrain
In numbers: PKK’s money network in Europe
Germany: PKK collectors typically bring in $18 million in cash a year – amount has trebled since 2010
Revolutionary tax: Investigators say about $2 million a year raised from ‘tax collection’ around Marseille
Extortion: Gunman convicted in 2023 of demanding $10,000 from Kurdish businessman in Stockholm
Drug trade: PKK income claimed by Turkish anti-drugs force in 2024 to be as high as $500 million a year
Denmark: PKK one of two terrorist groups along with Iranian separatists ASMLA to raise “two-digit million amounts”
Contributions: Hundreds of euros expected from typical Kurdish families and thousands from business owners
TV channel: Kurdish Roj TV accounts frozen and went bankrupt after Denmark fined it more than $1 million over PKK links in 2013
World record transfers
1. Kylian Mbappe - to Real Madrid in 2017/18 - €180 million (Dh770.4m - if a deal goes through)
2. Paul Pogba - to Manchester United in 2016/17 - €105m
3. Gareth Bale - to Real Madrid in 2013/14 - €101m
4. Cristiano Ronaldo - to Real Madrid in 2009/10 - €94m
5. Gonzalo Higuain - to Juventus in 2016/17 - €90m
6. Neymar - to Barcelona in 2013/14 - €88.2m
7. Romelu Lukaku - to Manchester United in 2017/18 - €84.7m
8. Luis Suarez - to Barcelona in 2014/15 - €81.72m
9. Angel di Maria - to Manchester United in 2014/15 - €75m
10. James Rodriguez - to Real Madrid in 2014/15 - €75m
Specs
Engine: Duel electric motors
Power: 659hp
Torque: 1075Nm
On sale: Available for pre-order now
Price: On request
Scoreline
Chelsea 1
Azpilicueta (36')
West Ham United 1
Hernandez (73')
Company profile
Name: Tratok Portal
Founded: 2017
Based: UAE
Sector: Travel & tourism
Size: 36 employees
Funding: Privately funded
UAE currency: the story behind the money in your pockets
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Business Insights
- Canada and Mexico are significant energy suppliers to the US, providing the majority of oil and natural gas imports
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- US domestic suppliers might benefit from higher prices, but overall oil consumption is expected to decrease due to elevated costs
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Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
Honeymoonish
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