Tax-fuelled changes spell a new dawn

▶ A large percentage of revenue will be allocated to improving local services

The public response to the introduction of VAT in the UAE has been predictably mixed. Some felt it was a necessary step in the move away from an oil-dependent revenue. Others, however, plainly felt that their wallets would be hit by the introduction of the consumption tax. Such a wide range of reactions was understandable given that VAT – a tax levied on goods and services and collected by businesses on behalf of the government – can seem perplexing in an economy where consumers are unused to such a scheme.

There will always be some scope for abuse and the tax authority has pledged to take on profiteers. Last month several businesses were found to be hiking prices by claiming VAT on their products before it was introduced. Since the year began, the issue of rounding up prices for goods has been up for debate. But more than a week after its formal implementation across the UAE, what is striking is the frictionless manner in which the country at large has adapted and is adjusting to it. At the same time, there is residual wariness, as there always is in matters of taxation. However, even the sceptics have reason to embrace VAT after Sunday’s meeting of the UAE Cabinet. Sheikh Mohammed bin Rashid, the Vice President and Ruler of Dubai, who chaired the meeting, announced that 70 per cent of all the revenues collected from VAT will be channelled back into local government projects. The provision of “better local services, greater community development and wider support for our citizens” will be the chief objectives for the majority of tax revenue. The projects that receive funding will be governed by transparency and citizens will be consulted as the government strives to create conditions in which they might “achieve a decent living for them and their families”.

This is a smart move on the government’s part. It has not only earmarked future revenues for projects designed to enhance the lives of ordinary citizens – it has also, in one stroke, assuaged any lingering doubts about VAT. Next door, Saudi Arabia has achieved the same result by accompanying the implementation of VAT with a rise in subsidies to citizens. In the UAE, the government has opted for increased public spending and making sure money that comes into the public purse is used for projects that benefit the country and its people. Both models, though different, are undergirded by the same motive. VAT is the beginning of this country’s – and this region’s – transformation into a prosperous post-oil economy.