Decades of tax-free living are set to come to an end across the GCC when the respective countries, including the UAE, has introduced value-added tax (VAT) in 1st January 2018. The announcement spread all among the Abu Dhabi population and also caused anxiety to the people regarding VAT.
By set at five percent, the new impose seems a small figure. As when we compared to the 150 other countries already implementing VAT or the process of VAT registration or a similar method of taxation (in the UK, for example, VAT is 20 percent).
Yes, we might see a general rise in our cost of living, but there’s no need to panic about anything, with the GCC members have already agreed to exempt 94 food products, as well as school fees and healthcare bills, from the new taxation in UAE.
The new levy will, according to a professional services company, help governments in the region “deliver on long-standing plans for economic diversification away from oil, while still being able to deliver social and economic programmes”.
What are the upsides to introducing VAT in the UAE?
Expert 1: “VAT has introduced in the UAE with a new source of income, which will contribute to the quality of our public services now and into the future, which is great news for us all in Dubai. And it will also establish lots of VAT Registration Service provider company that partially Contribute. It will also help the government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue, creating a more stable economy for us all to enjoy and prosper. Even at a low rate, VAT has the potential to raise huge amounts of revenue. And as the UAE is one of the most globally ambitious countries, with trillions of dirhams of infrastructure projects scheduled in the next ten to 25 years, the creation of a stable revenue stream is good practice by the government.”
Expert 2: “VAT will be a source of income that will help fund projects and services for the benefit of the people and will also help the government diversify away from oil and gas revenues as sources of income. Here I believe it won’t discourage business, as it is a consumer tax, and overall VAT is relatively simple in concept and politically far less controversial than direct taxes such as income tax.”
So how will the new tax affect the cost of living in the UAE?
Expert 1: There are so many great things to see and do, that your salary might be burned away very easily after application on VAT. VAT, however, is not going to break your bank. Various studies and surveys over the years in multiple countries have concluded that there was no acceleration in the rate of price rises attributable to VAT.
Expert 2: The bulk of consumer spending is going to face after a cost of five percent next year. We have been told that essentials (health, education, basic foodstuffs) will not increase but most things will.
How are the hotels and restaurants preparing for VAT in Dubai?
Those who have operations in other countries, where VAT already exist, have already drawn up an implementation strategy and timetable and all that’s left is for the full details to be released before going ahead with their plans. Those who have so far only operated in the UAE or other VAT-free countries are still busy gathering information on how VAT will affect them.
How feasible is it that some companies might raise prices early, to avoid scaring consumers off in January?
It’s feasible, of course. Having said that, I think it’s somewhat unlikely. I think it’s going to be a bit like when the euro was introduced as currency in the Eurozone. We just woke up, went to the shop and, voila, everything was in euros. Did things get more expensive? Some did, some didn’t, but the point is that it was a level playing field – everyone knew what was going on and when things would come into effect.
What measures might hotels and restaurants take to offset the price increase and keep customers?
“We’re not looking at a tax that only applies to a few hotels, but not to others. Everyone is in the same boat. Consumers will understand that VAT applies to virtually all businesses and services, so I question whether there’s a need to offset anything. What some of our F&B clients do in Europe is to run ‘Tax-free Mondays’ or similar promotions, where they discount food and drink by the tax amount, giving the illusion that items are actually tax-free. But it’s just another discount, of course. If businesses feel the need to save costs or maintain their customer base, they would probably face the same issues without VAT.”
So how will VAT impact our friends that run businesses here?
Expert 1: While the consumer pays the final bill including VAT, businesses will incur a cost, and management time and risk. Businesses with an annual turnover of more than Dhs375,000 will have to register for VAT, administer and account for it, as well as understand how the whole system works. They will have to take advice, amend their accounting systems and, in many cases, add more staff to deal with VAT. They will charge and collect VAT, as well as paying and reclaiming VAT. Even though the major cost of the tax is ultimately passed on to the consumer, businesses will likely have increased costs of administration and potentially cash-flow costs. They also carry the risk of penalties for getting it wrong.”
So how will VAT impact our friends that run businesses here?
Expert 1: While the consumer pays the final bill including VAT, businesses will incur a cost, and management time and risk. Businesses with an annual turnover of more than Dhs375,000 will have to register for VAT, administer and account for it, as well as understand how the whole system works. They will have to take advice, amend their accounting systems and, in many cases, add more staff to deal with VAT. They will charge and collect VAT, as well as paying and reclaiming VAT. Even though the major cost of the tax is ultimately passed on to the consumer, businesses will likely have increased costs of administration and potentially cash-flow costs. They also carry the risk of penalties for getting it wrong.”
Expert 1: “That’s all very true. Companies will need to budget for the event and consider the impact on all aspects of their business: IT, human resources, procurement, finance, legal and marketing. The VAT will be applied on goods and services at each stage of the supply chain with the final payment, in theory, being borne by the consumer. For example, when you go to a retailer to buy a new pair of jeans, you pay VAT on your purchase. The retailer you bought the jeans from paid VAT, too, to the factory they bought the jeans from and the factory paid VAT to the farmer who delivered the cotton to make the jeans. Businesses are able to claim VAT back, so in essence, they become a collector of tax for the government. Also, all businesses should be reviewing their current contracts to make sure VAT has been appropriately addressed.”
Which companies or sectors will be most affected by the arrival of VAT in UAE?
It’s difficult to say. I think the top and bottom ends of the hospitality industry will continue to do fine, but the problem lies in the middle. That’s probably true for most industries. Consumers who go for top-of-the-range options (hotels, cars, fashion, etc.) will continue to do so as they have the necessary income. The same is true for bottom-of-the-range options. The battle will be fought in the middle, e.g., do I really want to spend Dhs400 plus VAT on a Friday Brunch every week or do I go to a place that only charges Dhs140 plus VAT. Or do
I not go to brunch every week and instead go only once a month, but then spend Dhs800 plus VAT. The same applies, I believe, to other industries.
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