In 2014-15, the world saw a steep plummet in oil prices. Whatever the reasons were, this fall gave the UAE and other GCC nations a clear indication to look beyond oil.
UAE’s fiscal deficit was 2.1% of overall GDP last year, despite strong efforts to counter lower oil prices. It was time to apply some basic transformations in the economy and think about other revenue sources.
This realization resulted in the idea to implement taxes to reduce reliance on revenues from oil. In this effort, UAE government recently announced the first stage of tax implementation process, where VAT (value added tax) will be introduced on some goods and services starting from January 1st, 2018.
This effort will make UAE the first country in the Arabian Gulf to introduce an indirect tax on consumption. Other GCC (Gulf Cooperation Council) members are expected to follow the process in the near future. These nations were discussing a pan GCC VAT for the latter part of the decade. In May last year, they finalised a draft agreement on the proposal for VAT.
According to UAE’s minister of state for the financial affairs, Mr Humaid Obaid Al Tayer, VAT will be levied at 5 percent.
In the first stage of the implementation luxury goods like alcohol, tobacco, etc. will be a part of taxable products. Basic goods and services covering almost 100 items will be exempted from the VAT.
A period of 18 months will be provided to private firms before the final introduction, for understanding and preparation for the tax. To avoid penalisation and legal liabilities, a business firm with more than the minimum annual turnover required (Dhs3.75 million proposed) will fall under the taxable criteria.
Exact figures for the minimum annual turnover required, are yet to be declared by the ministry of financial affairs. Also, to avoid further penalisation, the companies need to update their policies to apply VAT correctly.
Financial experts believe that UAE is ready for the change. According to them, the country is in a strong position because the policymakers have full confidence in the private sector, and believe that its economy is more diversified and less dependent on oil.
IMF suggested UAE reduce dependency on hydrocarbon-based revenue and acknowledged its plan for VAT, hoping for tax implementation in the future.
According to IMF, an implementation of a mere 10% tax on non-hydrocarbon products can increase revenue by 4.1%, a big number if we look at the current GDP growth of 5.2% per annum. Ministry of finance, UAE, predicts a revenue of Dh10 billion to Dh12 billion in its very first year.
Many economic experts agree that VAT will provide stability in the long run. Also, this small tax is expected to create a more systematic consumption pattern among the consumers as they will be more thoughtful while spending.
The road for this change is not as easy as it looks.
The government is going to face two major challenges in the implementation of the VAT. The first challenge is to provide the infrastructure and to create a base for the tax system. In a nation where there is no structure for tax, it will not be easy to implement it.
They will have to create a base structure from scratch, which is going to take time, money, and human resources. Apart from that, they will also have to organise awareness programmes and set up laws and clauses for it. The second major challenge, which is a little tricky, is to sustain the tax-free branding of UAE.
According to a survey by the CFA society Emirates, more than 80% of professionals will leave UAE in case of declaration of further taxation like individual tax i.e. income tax.
Also, tourist sector will see inflation in the cost of goods as the majority of products falling under the VAT criteria are used by tourists.
Other than these challenges faced by the government, the common consumer will also face initial problems. There is a possibility that VAT will bring higher inflation along with it, which can affect the consumer’s pocket.