VAT’s the way to go for the UAE economy

Clarity of vision always helps during tough market conditions. The UAE is a fine example of how smart policy and a pragmatic outlook can help weather storms in a rapidly changing economic landscape. In the current scenario, where oil rich nations are grappling with low revenue streams, the UAE has largely remained resilient. And that’s because it had introduced a slew of reforms ahead of time, including measures that allowed diversification of its economic base, introduction of subsidy reforms and significant investment in infrastructure. Today oil revenues contribute only 25 per cent to the overall economy. There is a gradual shift away from this stream of income, which is what makes introduction of a value added tax, or VAT, so crucial. The UAE’s financial house is in order, which means residents would have to pay a nominal tax of about 5 per cent, and not more. In some western countries, this percentage is as high as 27 per cent.

VAT is the norm in some 140 countries globally, and is seen as among the best ways to make the population pay for the services rendered by the government such as security and infrastructure. In the UAE, revenue generated from VAT would strengthen and shield the economy further from external shocks or headwinds. The tax might pinch household budgets a little but the government is trying to minimise the impact by leaving a number of essential goods and services out of the tax net. Back of the envelope calculations by economists suggests this new tax could shave off three per cent of household incomes. The move is bold and pragmatic, one that will only increase the attractiveness of the emirates, and not affect it negatively as some commentators might say. A number of multinational businesses that have been in the UAE for decades would certainly not make investment decisions predominantly driven by tax rates. They would continue to stay put. Expatriates, on the other hand, would value being a part of an economically robust nation.