Abu Dhabi to introduce 30 per cent alcohol sales tax

Gillian Duncan

June 12, 2018

Abu Dhabi will introduce a 30 per cent tax on alcohol sold in off-licence outlets.

Retailers have received a circular informing them about the introduction of the new tax.
The levy will come into force on June 15 after Ramadan, bringing it in line with Dubai, which already
imposes a 30 per cent municipality tax on alcohol sold in off-licence outlets.
A Dh230 fee will also be introduced for special licenses, which enable non-Muslims to purchase alcohol.
The licenses were previously free.
Retailers were informed about the changes, which are being brought in by the Abu Dhabi Department of
Culture and Tourism, several weeks ago.
Many have displayed notices in stores to inform their customers of the changes, and some, such as
Spinneys, are offering discounts in the run up to the introduction. The chain is offering a 15 per cent
discount on the price of non-promotional items from tomorrow until the end of the month, according to
staff at one of its stores.
News of the 30 per cent hike has been the subject of much discussion on social-media among expatriates
– many of whom have said they will be stocking up before June 15.
A lot of the reaction has been negative, but it has garnered some support.
“Calm folks! It could have been 100 per cent just like tobacco. Especially as they’re taxing these ‘drugs’
for your own benefit and health,” wrote one member of the Abu Dhabi Q&A Facebook page.
It is not yet clear if the fee is inclusive of or additional to the 5 per cent VAT that applies to goods and
services in the UAE.
Some outlets are offering pre-tax discounts this week before the fee introduction.
In the UAE, alcohol is available across most of the country – but there are very strict rules regarding the
sale of wine, beers, spirits and other alcoholic drinks.
Sharjah is the only “dry” emirate in the UAE. Elsewhere, people can drink in specially licensed bars and
restaurants and purchase alcohol from off-licenses, which are often, but not always, located near
supermarkets.
Only Dubai and Abu Dhabi issue licences that can be used to purchase alcohol at special retailers.
A licence is obligatory for non-Muslim residents in the UAE who wish to consume alcohol at hotels, bars,
restaurants and at home. These licences are valid only in the emirate that issued the licence.
To obtain an alcohol licence, applicants must prove they are non-Muslim, are over the legal drinking age
of 21, earn more than Dh3,000 a month and possess a UAE residency.
It is illegal to acquire, drink, supply, sell or offer alcoholic drinks to those without a valid licence, with a
possible penalty of imprisonment for six months, a fine of Dh5,000 or both.
Tourists can consume alcohol in venues that are licensed, but if they commit a criminal offence while
under the influence they may also face charges of consuming alcohol.
 The article discusses about the incoming tax that will be imposed by Abu Dhabi on

alcohol. Alcohol is considered a ​de-merit​​ good, a good or service that is perceived as socially

undesirable due to its negative effects. Thus, alcohol consumption is considered to render

negative consumption externality​​, a person’s use of a product creates third party costs. This

further creates ​market failure​​ and ​deadweight/welfare loss​​, a loss of societal utility from

allocative inefficiency​​ where marginal social cost (MSC) is unequal to marginal social benefit

(MSB). Currently, it is stated that Abu Dhabi will impose a 30% ​ad valorem tax​​, a tax based on

a percentage of the purchase price, on alcohol. Additionally, alcohol has ​inelastic price

elasticity of demand​​ in which consumers have a low responsiveness or sensitivity to a change in

the price of a particular product. In this case, alcohol is price inelastic due to its addictiveness.
 As shown in the diagram above, there is a negative externality due to alcohol

consumption. For example, if a driver who consumes excessive alcohol crashes into an innocent

driver, this could cause damage to the person’s vehicle or potentially kill them. Thus, the

marginal social benefit (MSB) curve lies to the left of the marginal private benefit (MPB) curve,

illustrating the greater benefit received by the private drinker in relation to the benefit enjoyed by

society overall. This, in turn, creates welfare loss (indicated in the triangle containing E​1​ and E​2​)

in which third parties will eventually have to pay.

The diagram above depicts the effects of imposing a 30% Ad Valorem tax on alcohol.

This form of indirect tax makes it so that as the price of the product increases, the tax also
increases. Thus, it decreases the quantity demanded for alcohol (Q​1​ to Q​2​); however, this is not

by a large amount for the case of alcohol due to its inelastic PED. And because alcohol has

inelastic PED, total revenue would increase when price increase or when tax is imposed. Also,

welfare loss is decreased from the region ABE to CDE, meaning that a step towards achieving

allocative efficiency was made.

Although it is not explicitly stated in the article, we can assume that this tax was

introduced by the Abu Dhabi government in attempt to internalize the externality in which would

compel the people involved in the market to pay for the costs caused to society rather than the

third party. This has the beneficial effect of reducing consumption of alcohol, leading towards

optimum level expected from society. Although this is a very desirable outcome, it has its

limitations. In the case of the article, Abu Dhabi imposes an ad-valorem tax where there are both

positive and negative consequences for different stakeholders and time spans.

In the short run, alcohol is a product with inelastic PED thus consumers won’t be as

responsive to a change in price. Although the consumers have to pay more money, they are still

able to access alcohol in which they are addicted to and producers won’t experience huge losses

as quantity demanded decreases by little. However, it must be noted that moderate drinkers will

be discouraged to drink given the high price, but binge drinkers will continue to drink despite the

high price. Nonetheless, the government benefits by earning more revenue for themselves. This

revenue can be used for improving living conditions through the aiding of public facilities and

investments in societal developments.

It is through the examination of the long run where the effects of the tax seem to have a

significant effect. Consumers of alcohol, due to increased time to respond, will look for
alternatives as they realize the price is starting to have a significant effect on their lifestyle by

hindering them from buying much more useful and healthier option such as water or fruit juice.

This will benefit the firms or industry of non-alcoholic industry, substitute goods to the product

of alcohol, because consumers will start buying more of non-alcoholic beverages. Additionally,

the consumers will be able to ameliorate their lifestyle through a more healthy approach as well

as buying things that are more necessary such as fruits with the increased disposable income they

possess. Therefore, due to this significant decrease in demand for alcohol, producers will suffer

great losses in terms of revenue. Overall, there are drawbacks associated with this tax, but the

benefit of decreasing alcohol consumption seem to be a significant factor that can’t be

overlooked and thus this policy seems to be effective.

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Citations

"Abu Dhabi To Introduce 30 Per Cent Alcohol Sales Tax ." ​The National.​ N. p., 2018. Web. 5

Dec. 2018.

Maley, Sean, and Jason Welker. ​Economics: Developed Specifically for the IB Diploma.​

Pearson Education, 2011.