VAT and excise taxes to lift consumer prices by a modest 1.4%

The introduction of taxes including VAT could lead to a one-off increase in consumer prices of about 1.4 per cent, a senior tax official says.

Value added tax and excise levies on tobacco, energy drinks and some sugary drinks will be brought in on January 1 and in the fourth quarter of this year.

Khalid Al Bustani, director general of the Federal Tax Authority, said yesterday the estimated rise in prices was based on Ministry of Finance studies.

The price increases will be triggered by the application of the 5 per cent VAT on goods and services, and the 100 per cent excise on tobacco products and energy drinks, and 50 per cent tax on sugary carbonated drinks.

Forecasts of such a moderate affect on the cost of living will be a relief to consumers at a time of little wage growth.

“It’s possible that the Federal Tax Authority has modelled the impact of VAT, engaged with businesses and has concluded that they will absorb a proportion of the 5 per cent tax,” said Jeremy Cape, partner at London law firm Squire Patton Boggs.

“There will also be supplies exempt from VAT, or subject to the zero rate, and the impact of prices should be less there.”

But Mr Cape said that with VAT at 5 per cent, at the start prices will probably increase by a similar amount “and that has been the experience in a number of other countries”.

The UAE expects to publish laws on value added tax (VAT) as well as an excise tariff by the end of the current quarter, levies that may increase overall consumer prices by an average one-off hike of 1.4 per cent, a senior official said yesterday.

The UAE will implement a 5 per cent GCC-wide VAT on January 1, and excise tariff by the fourth quarter, Khalid Al Bustani, the director general of the country’s Federal Tax Authority said in a press briefing yesterday.

In June Saudi Arabia introduced excise taxes, the first Gulf country to do so. The country also published a draft VAT law that was approved by its Shura Council in July, paving the way for legislation being implemented on January 1.

Both the UAE and Saudi Arabia are implementing a 100 per cent excise tax on tobacco products and energy drinks, and a 50 per cent tax on carbonated drinks.

Other GCC states have until the end of 2018 to introduce the taxes, said Mr Al Bustani.

Gulf states are introducing consumption taxes for the first time to create new revenue streams after a three year oil slump dented income and widened deficits.

The implementation of the GCC-wide tax is expected to boost GDP by about 1.5 per cent with the implementation of the 5 per cent VAT, the International Monetary Fund has said.

In the UAE, VAT could generate Dh12 billion in its first year and Dh20bn in its second year, according to Sultan Al Mansouri, the Minister of Economy.

Mr Al Bustani said the authority expects to register an estimated 350,000 companies subject to VAT by the end of the year, with 250 expected to register for excise tax.

Businesses would be able to register online for VAT and excise tax starting mid-September.

“We have a plan for the registration of the companies for the VAT and excise taxes through a phased approach and the approach will be based on the size of the turnover of the company, which will be announced at a later stage,” said Mr Al Bustani.

“And the first stage will involve the registration of companies related to the excise tax.”

Companies with annual turnover of Dh375,000 and above must register for VAT, or they will face penalties if they fail to do so.

Residential property in the UAE, some financial services, undeveloped land, local transport and most insurance will be exempt from VAT.

The UAE last month issued the Tax Procedures Law, setting the foundations for the planned UAE tax system, regulating the administration and collection of taxes and defining the role of the Federal Tax Authority, and paving the way for more specific legislation on VAT and excise tax.

Financial professionals in the UAE have warned that many businesses are ill-prepared for the VAT introduction, and will only begin taking the tax seriously after it comes into force in the new year.