Will consumers be hesitant to buy after VAT?

DANYAL TIRMAZI, engagement manager at Sunstream Research & Consulting, offers his insight on what retailers and consumers can expect with the implementation of the VAT.

VAT is applicable on retail items from basic foods to fashion to television sets, at the standard five per cent rate. As for how the tax could affect consumers, it really depends on three factors, all governed by the level of demand described here.

The first factor in our opinion, involves the relative value of the product. A smart laptop at Dh6,000 will cost an extra Dh300. At this level, shoppers may be more willing to hold off a purchase and compare and contrast for a better deal.

Five per cent is not that high however — especially when compared with VAT around the world. Hence, with smaller value purchases, a bottle of milk at Dh5 say, then the difference is 25 fils — not that significant.

The second factor affecting consumer behaviour is the level of need or desire for something. With respect to need, staple foods such as bread and rice will still need to be consumed. As for desire, a new mobile phone at Dh1,000 for many will still be worth buying at Dh1,050. Hence on the basis of need and desire, the VAT should make little or no difference.

With regard to our third point — where products are readily available at more than one retailer — such as the mobile phone, the milk or the laptop. If there is little or no difference, then stores might want to absorb the value of the VAT, or part of it, in order to gain price advantage and win customers. As a possible measure to mitigate a drop in sales, it also comes at the cost reducing profitability.

There are many theories on how consumers will respond, but the exact market reaction can only be seen when the implementation has come through.