UAE will implement five per cent value-added tax (VAT) from 7am on January 1, 2018, with a few goods and services zero-rated and exempted as part of the GCC-wide agreement.
Being an indirect tax on consumers, VAT will be applicable on most daily usage goods and services that residents consume, helping the government to boost its coffers to further improve infrastructure and offer better facilities.
Categorised in three segments - five per cent standard rate, exempt and zero-rated - VAT is one of the most common types of consumption taxes in the world as it's levied in more than 150 countries.
In the UAE, the Federal Tax Authority has asked all entities and individuals crossing the threshold of Dh375,000 to register and get approval before January 1, 2018, to ensure that they don't face any penalties.
As per the regulations, the sectors that will be subject to five per cent VAT include food and beverages, utility bills, private transport services, hotel services, entertainment, electronics, school uniforms, commercial rents, cars and jewellery, among others.
The categories that have been exempted include healthcare services, medicines, tuition fee, local transport, residential rents, surgery and certain government services.
VAT is normally charged at each step of the supply chain and it ultimately ends at the consumer who pays the tax. However, producers charge it from suppliers and suppliers shift the cost to the consumer. In the case of zero-rated services, the companies can claim refunds from the government.
Analysts believe that VAT will not have a big impact on the cost of living as the rate is one of the lowest in the world. They said that the lower-income class is already aware of its income and expenses, so they know what and where to spend. However, the bigger impact could be on middle-income residents who earn around Dh20,000 as their grocery, fuel, kids' school costs and others will increase marginally. Meanwhile, the high-earning class will not feel the impact considering their high incomes and low inflation.
There are more than seven million expats living in the UAE who send, on average $20 billion remittances to their home countries each year. Remittance fees are as low as Dh18 to as high as Dh55 for the United States, United Kingdom and European corridor.
In the GCC, the UAE and Saudi Arabia will be the first two countries to launch VAT from January 1, while other countries will follow in the coming years.
Key source of income
The introduction of VAT will help the UAE government to generate an estimated Dh12 billion worth of revenue in the first year, which will increase to Dh20 billion in 2019.
"Collection of VAT will boost government revenues. This, however, may or may not be used to increase government spending that generally boosts GDP growth.
We have downgraded the UAE's GDP growth forecast to two per cent in 2017 from three per cent in 2016 as a result of oil production cuts. Though GDP growth is expected to increase next year, it is mainly on the back of improvement in the non-oil sectors and infrastructure spending relating to Expo 2020," said Anita Yadav, head of fixed income research and senior director of wholesale banking at Emirates NBD.
Akber Naqvi, executive director and head of asset management at Al Masah Capital, said VAT is expected to have a positive impact on the UAE's economy, especially as an alternative source of revenue for the government. However, the implementation and execution will be important for the success of such reforms to have a meaningful and sustainable impact on the broader economy. The long-term impact will take a few years to crystallise after the introduction in 2018, especially as this system will take time to be streamlined across all industries.
"VAT has been an important source of revenue in many advanced and developing economies as the government is empowered to fund various developmental projects, thereby accelerating economic growth. Timely implementation of VAT would help the UAE's GDP growth to retract from the adverse impact it had suffered in the last three years due to low oil prices," he added.