With VAT, it will still be business as usual in UAE

Consumers might see a slight jump in bills, but the proposed tax should not be a cause for alarm

Reactions to the impending January 1, 2018 implementation of a value-added tax (VAT) in the UAE range from mild indifference to outright panic. Somewhere in between lies confusion, as the UAE’s (and the GCC’s) long-standing tax-free regimes inexorably draw to a close. What is required instead is sober, measured preparation on the part of both businesses and consumers. The Federal National Council approved the draft law recently and although the level of VAT has not been confirmed, it is widely expected to be five per cent. Goods and services like essential food items, education and health care are expected to be exempt, and if the VAT models used successfully in Singapore and other countries serve as a guide, then residential resale property and rentals are likely to fall into the exempt category as well.

For businesses, the implications are clear. Large businesses will incur additional administration costs in complying with the new tax. Companies with long supply chains will need to watch these carefully, monitoring the payment and credit of VAT at each step along the chain. SMEs will need to pay attention to and formalise accounting procedures and implement fairly rigorous documentation methods to capture the necessary information for VAT compliance. One common misconception among SMEs is that VAT greatly increases the cost of doing business. Apart from a small cost of implementing the processes mentioned above, this should be negligible. Since the tax is on value added at each step in the process, each successive step claims a ‘refund’ from the previous step and it is the consumer who pays the full amount of the VAT at retail. Businesses can, of course, choose to absorb the VAT and not pass it on to the consumer. In such cases, the consumer gains but the VAT still has to be paid by the business.

Consumers may see a small increase in their bills but five per cent should not be a cause for alarm. The bulk of basic consumption spending in the UAE is likely to be VAT-exempt. In time, residents will get used to seeing the VAT amount tagged on or included in their restaurant or entertainment bills, and as long as the rate remains close to the expected five per cent rate, it should not alter consumption habits significantly.

Large businesses in the UAE have accounting departments and probably will be able to ease into the new VAT regime without too many hiccups. SMEs with a turnover just under or above the proposed threshold of Dh370,000, on the other hand, will have to discipline themselves to transition from the usual disorganised ‘shoe box’ paper records to digital accounting and record keeping and this could turn out to be a blessing in disguise. Small businesses will be able to actually monitor and accurately track their performance and costs — something of a novelty, which might lead to greater efficiency and even a competitive advantage.

The UAE, like other GCC countries, has clearly realised that the days of depending exclusively on natural resource revenues to fund expenditure and growth are over. Alternative sources of government revenue need to be devised and the envisaged five per cent VAT is possibly the easiest and gentlest introduction of a tax regime in the present circumstances. However, the question uppermost in the minds of most residents is whether this VAT introduction will lead to inflation.

In the European Union (EU), VAT rates range from 15 to 27 per cent. The VAT regime has been in place for several years now and has not directly been the cause of any uncontrolled price rises in the EU. VAT has become embedded in the price of goods and services to the point where

If the VAT models used successfully in Singapore and other countries serve as a guide, then residential resale property and rentals are likely to fall into the exempt category as well

it is not perceptibly noticed by consumers. For example, if a person rents a car in Spain at €15 per day, this price includes VAT and is usually deemed by the renter to be a competitive rate. Inflation rates in the Eurozone are creeping up to the 2 per cent mark now but this is more due to increased macroeconomic activity and is seen as a welcome sign of recovery as compared to the deflationary scenarios that prevailed in 2013-14 period. One only has to look at Japan to see how detrimental deflation can be for an economy.

The likelihood of inflation in the UAE due to the introduction of VAT is therefore slim. The consumer price index (CPI), generally used to measure inflation, consists of a weighted ‘basket’ of goods and services and if, as predicted, the bulk of the basket is made up of VAT-exempt goods and services, it should be business as usual in the UAE. Dr Sanjay Modak is Visiting Professor of Economics at the Rochester

Institute of Technology, Dubai.