VAT will have moderate impact on UAE inflation

Inflation in the UAE is set to witness a moderate increase next year with the implementation of five per cent value added tax (VAT) from January 2018, analysts said.

“Inflation in the UAE is expected to be circa 2.5 per cent in the current year. Introduction of VAT in 2018 is likely to see this rise to over three per cent,” said Anita Yadav, head of fixed income research at Emirates NBD Research. She noted that there are multiple factors that affect inflation including interest rate hikes, currency strength and economic growth.

Akber Naqvi, executive director and head of asset management at Al Masah Capital, sees VAT increasing inflation by 1.5 per cent to two per cent in the first year post introduction. However, the impact will start to normalise in the following years as the initial impact will be factored in during the first year of introduction.

According to the International Monetary Fund, UAE inflation is projected to reach 3.6 per cent in 2018, almost 80 basis points higher than the estimated 2.8 per cent in 2017.

M.R. Raghu, managing director of Marmore Mena Intelligence, said VAT, being an indirect tax, would certainly increase the price of goods and services for the end consumer leading to spike in inflation. In the long term, he said, inflationary impact of VAT depends on the policy considerations of government such as deciding the basket of items that will be under the purview of the tax and the magnitude of the levy to be imposed on these items. Inflation can be expected to smoothen in the medium term.

“The increase in inflation will normalise after the initial rise of 1.5 per cent to two per cent in the introductory year. However, the impact on consumer demand could possibly change the scenario, which means the real impact might be negligible post the introductory period,” he added.

Yadav noted that the sectors likely to be least impacted are the basic necessities such as the medicine, state provided education and public transport etc.

“Certain sectors such as construction, commercial real estate and luxury retail are expected to be taxed at five per cent, pushing the prices of output from these sectors higher. The impact on residential real estate could be lower compared to commercial real estate, as first time transactions for new properties are exempted from VAT. Apart from the rising cost of goods and services, compliance cost and system upgradation would be other pressure-points for businesses,” Raghu added. — waheedabbas@khaleejtimes.com