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Effects of implementation of VAT in the UAE

Value Added Tax (VAT) is expected to be introduced at a rate of 5 percent with some limited exceptions including basic food items, healthcare and education. The UAE are planning to implement on 1st January 2018 — other Gulf Cooperation Council (GCC) countries may do so at the same time or by 1st January 2019 at the latest. The GCC member states are in the process of approving the long anticipated common framework for the introduction of a Value Added Tax (VAT) system in the GCC. The common VAT framework will form the basis for the introduction of a national VAT system by each member state. While there are a number of challenges that still need to be addressed before it is introduced, VAT will help governments to deliver on long-standing plans for economic diversification away from oil, while still being able to deliver social and economic programs. It is estimated that the UAE will generate more than Dh12 billion additional revenues in the first year and Dh 20 billion in the second year after implementation of this new tax.

Companies in the UAE that report annual revenues of over Dh3.75 million will be obliged to be registered under the GCC VAT system. Companies whose revenues fall between Dh1.87 million and Dh3.75 million will have the option to register for VAT during the first phase of the VAT implementation. However, it will eventually become obligatory for all companies to be registered under the system, when it is rolled out in the second phase, regardless of the reported revenues. The UAE will remain tax-free in many ways even after the implementation of VAT as there is no income tax on salaries in the country. Free zones in the country also offers tax free environment including 100 per cent foreign ownership in free zones, ease of doing business.

The VAT in UAE will not only have an effect on the consumers and buyers but will also have a wider impact on the commercial establishments and businesses in UAE. It will practically affect all the functions of the business including human resources, finance, purchase and procurement, IT and marketing etc. While MNCs are already accustomed to the tax systems worldwide, SMEs, which were historically working on cash books without proper accounting, will now have to maintain proper accounting records which will help the businesses in monitoring and reviewing their cost structure and do business in a more informed manner.

 

Businesses will have to adapt to the changes by identifying the impact of VAT on their business, and key immediate considerations are to:

  • Assess capability of existing systems
  • Identify VAT implementation strategy
  • Identify contracts that need a VAT action
  • Identify intercompany transactions
  • Undertake training / awareness

While there may be general rise in cost of living, there is no immediate need for the expats to pack their bags yet. Due to VAT, consumers are expected to feel the burden of tax on telecom, electricity and water and food bills, which will also lead to effective utilization of these items particularly electricity and water. Overall, there will be an impact of around one per cent to 1.5 per cent on household budgets. According to financial experts of the world, the implementation 5% VAT in the U.A.E will increase the price levels, and an increase in inflation rate by 0.4-1.4%. The increase in inflation rate is dependent on the incremental value of CET. There are several factors which determine the continuous increase in the inflation. The employees might demand to increase their wages to accommodate the increase in prices of general goods.

It is estimated that implementation of VAT might increase GDP at the rate of 1.5% which is one-fourth of the deficit being faced by the GCC countries i.e. US$350 billion. This rate also depends on the products or services which are exempted from the VAT. The ability to collect proposed VAT and its coverage might also affect this rate. It is estimated that the Western households of the country were to be least affected by the implementation of the VAT. It is also known that the poorer households are affected mostly from the enforcement of VAT. Even if the food and health are exempted this impact remains there.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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