Taxation is a globally accepted practice by the state to generate revenue and subsequently fund expenditures that sustain the operation of the government. For so many years, the people of the UAE were basking in the glory of a tax-free lifestyle, however, a year ago the government announced that VAT would finally take effect in 2018 in the hopes of generating money to further improve the country.
The implementation of VAT in the UAE received a considerable number of reactions from both the consumer and the business sector. Mechanics of implementation, fear of inflation and the economic impact are few of the apprehensions that this region had.
Let us take a look at how this made an impact on the business sector, specifically e-commerce. We spoke to Sarah Jones, founder and CEO of Sprii.com, an e-commerce site for mums and kids products in the region, to share her insights on the implementation of VAT.
Sprii.com’s product offering ranges from diapers, strollers, baby essentials and toys to household essentials, cleaning products for the home, etc. – basically everything that a mum may need. Under the new tax law, none these products are exempt from the 5 percent VAT. Jones detailed two key points that she noted after the VAT implementation.
Whilst information about VAT has been disseminated long before its implementation, hiccups and challenges were still almost impossible to avoid when it finally took into effect.
Previously new product uploads and data management were fairly straightforward. However, with the introduction of VAT came an added step: data coming from the merchants had to be segmented into those merchants that were keen to shoulder the VAT burden and those that wanted to pass it onto consumers.
One may have thought that this should have been straightforward but up until the public holiday on 1 January 2018, many of the distributors had not decided how they would be amending their products prices… so it was a waiting game for e-commerce retailers. This meant a huge amount of extra resources to get streamlined as quickly as possible in 2018.
Conversion rate and consumer behavior
Conversion rate was a concern for many in the e-commerce game during the month of January. Would consumers carry on spending like they in 2017? Would consumers be more price sensitive?
In a region where VAT was previously unheard of, it was expected that many would be frantic over its possible effect on their spending power. Fortunately, however, the UAE’s population is composed of many nationalities where a five percent tax rate is considerably lower than the level they’re used to paying back in their home counties and therefore shopping habits have, it appears, been unaffected.
Although many UAE residents stocked up on products at pre-VAT prices at the end of 2017, where there was a huge surge in sales, customer conversion online has not taken the tumble that was perhaps expected in the first month of 2018. This may be due to the vertical that Sprii operates in where a large portion of the products are essentials.
The business, therefore, remains optimistic that the recent change in the taxation landscape of the UAE will not deter their growth in sales over the coming months.