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Effects of VAT in the UAE

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For several years, the International Monetary Fund (IMF) has been advising the UAE to introduce some form of taxation to create an alternative source of revenue for the Government to maintain services and infrastructure. With the fall in oil prices, this has become an acute issue for countries across the region and the most likely solution is the introduction of Value Added Tax (VAT) on certain goods and services. (In some countries, VAT is referred to as sales tax.) Younis Haji Al Khouri, Undersecretary at the UAE Ministry of Finance, was recently quoted in Emirates 24/7 confirming that GCC countries have agreed the framework for the introduction of VAT and, according to a recent report in Gulf News, the tax will be introduced on 1 January 2018 at a rate of 5%.

Globally, VAT is usually not applied to “essential” items such as food, children’s clothing, healthcare, energy etc. The UAE is expected to follow these norms and it is “luxury” items like automobiles, adult fashion, electronics and leisure activities that will be affected. The impact will be felt by these industries and those catering for tourists where there are already concerns being expressed about visitors having reduced spending power as a result of having to pay VAT. The Government may introduce a rebate scheme for tourists so that their shopping remains tax-free but it will be a concern if the UAE loses its sheen as a “tax free shopping paradise.”

For residents, however, there will be no such alternative. If economic conditions remain depressed for another 2 years then it is possible that retailers will have to adjust prices downwards to help absorb some of the blow from the introduction of the tax but, in the long run, UAE consumers will have to budget that much more for the purchase of their goods. Eventually, as has been the case in so many other economies, the knock-on effect will create inflationary pressure on all prices.

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