VAT’s a small price to pay for better services

On Sunday, His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-Preisdent and Prime Minister of the UAE and Ruler of Dubai, tweeted that the federal government will pass on a lion’s share of the revenue collected under the newly introduced value added tax, VAT, to local governments. It didn’t surprise many but reinforced trust in the government that remains committed to the welfare of the state and its people. The new stream of funds would reduce deficit, finance critical programmes, and raise the bar on the living conditions in the UAE. This has always been the driving principle behind this financial innovation anyway. A consumption tax is believed to discourage consumption, encourage savings, and generate higher economic growth. According to empirical evidence gathered by researchers in other countries, a percentage point increase in the VAT rate leads to about one per cent reduction in the level of consumption in the short run and to larger reduction in the long. Arguably, it was one of the main rationales for taxing consumption, and not income, which creates a dent on savings and investments.

The UAE is emerging as a global hub of innovation, and a regional leader in medical tourism and education. The infrastructure here outshines some of the developed nations, and its efforts to ensure a sustainable economy and reduce carbon footprint by investing in renewable energy are lauded the world over. The achievements have been impressive and elevated the status of the UAE from a small desert nation to an important player on the global platform. The leadership is respected for what it has achieved and the vision they have for the country. And now with the introduction of VAT, the UAE is looking to herald a new era of growth and development. Collections of around Dh12 billion this year, and between Dh18 to Dh20 billion the next year would fund economic and social growth and work in the best interests of people who call this country their home.