The introduction of a Value Added Tax (VAT) regime in the UAE marks the beginning of a new era in the history of the UAE economy where the general public will start sharing the burden of budgetary expenditure, starting today (January 1, 2018).
While the VAT is expected to contribute Dh12 billion to the UAE exchequer, studies show the consumption tax across GCC countries is expected to raise additional revenues between 1.2 to 1.6 per cent of GDP in the first year.
The UAE along with Saudi Arabia has taken the pioneering step in introducing VAT in the region. It will be implemented gradually across the GCC in phases over the next year.
The biggest concern around the introduction to tax is its impact on purchasing power and overall cost of living. Government and independent analysts have allayed fears that VAT will result in a sharp increase in cost of living.
“The impact of VAT on inflation and government revenue will vary depending on the proportion of consumption in the economy and how much of the consumption base is captured by VAT. We expect a portion of VAT to be absorbed by the supply chain,” Jihad Azour, Director of the IMF’s Middle East and Central Asia Department said.
By including a large number of items consumed by the general public in the zero rated or exempt category, the inflationary impact of the new tax has been largely muted.
“We expect a one-off inflationary impact from VAT. In the UAE, authorities estimate that excise taxes and VAT will add one percentage point to headline inflation, lower than our estimates,” Garbis Iradian, Chief Economist MENA, Institute of International Finance (IIF) said.
While VAT is applied at a uniform rate of 5 per cent on taxable supplies, a number of goods and services are either zero rated or in exempt category in the UAE, reducing the overall inflationary impact. However, it is true that VAT will reduce the purchasing power of UAE residents in proportion to tax payed on consumption.
Most common types
The fact that the UAE is new to taxation, the VAT implementation has come with its fair share of apprehensions in the minds to all stakeholders. VAT is one of the most common types of consumption tax that has been implemented in more than 150 countries around the world.
VAT is charged at each step of the ‘supply chain’. Final consumers generally bear the VAT cost while businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
Taxation is a globally accepted practice of augmenting and diversifying government revenues. Persistent low oil prices over the past three years have brought considerable economic pressure on the GCC countries. This had led to an urgent need to diversify revenue streams.
Although most expatriates living in the UAE are used to some form of indirect taxes in their home countries, the newness of taxation here has created some amount of unease among consumers and businesses. The introduction of a new tax in a region that is used to subsidies and absence of government levies, comes with apprehensions on the mechanics of implementation, impact on the economic growth and inflationary pressures.As for business that are integrating VAT into their invoicing, accounting and auditing systems, it is likely to come with some amount of initial hickups until people get used to the new system.