Impact of VAT on UAE Economy
Background of the Study
The six-member countries that constitute the Gulf Cooperation Council (GCC) became a free trade area through the integration of common customs tariffs in the year 2003. Based on the need to enhance investments and businesses, the GCC states agreed to initiate a common market (Harrison, 2017). Equally, the member states further decided to impose a Value Added Tax (VAT) across the GCC primarily to promote investments and trades. The GCC states embraced the New-Zealand VAT model with most of the authorities proposing a 5% VAT on the manufactured products (Al Mehrezi, 2013). The law commenced on January 2018 after a study and understanding of the impacts associated with the introduction of VAT on the economy by the state’s authorities.
However, most of the industries are not conversant with the statute as a majority of the individuals are still recovering from what has been considered a quick registration procedure. Considerably, the implementation of the law will have a significant consequence on the economy of associated nations (Mears, 2016). The policy is projected to affect the revenue collection and the sharing measures adopted by the UAE.
Impact of VAT on Businesses in the United Arab Emirates
Over the past decades, the citizens of the GCC precisely the UAE have enjoyed a period of a free tax system based on the stable oil prices across the globe. However, with the introduction of the 5% VAT on most of the commodities, it is believed the law is bound to have a significant impact on the economy (Mears, 2016). According to the policy makers, companies whose taxable supplies surpass the AED 375, 000 or are projected to exceed the amount in the next thirty days are required to register for taxation. Equally, commodities that are essential in increasing the country’s Gross Domestic Product (GDP) such as oil are not liable to tax. The zero rate charges are enacted on merchandises and services exported outside the GCC including education, health equipment, and provision of commercial aircraft.
Based on the financial specialist’s report, the execution of the 5% VAT on most of the merchandises in the UAE will cause a substantial effect on the price of products. Moreover, the implementation of the policy is believed to enhance the rate of inflation in the GCC states to 0.4-1.4% (Zafarullah, 2018). Most of the factors that determine the constant increases in the level of inflation include the need by the employers to escalate the wages primarily to accommodate the rise in commodity charges.
According to the authorities, the VAT is to be enacted at a rate of five percent, and it is projected that the system might enhance the country’s GDP to 0.4%. Studies indicate that poverty-stricken households are the most affected by the statute since they engage in the trade of taxable merchandises (Simionescu & Albu, 2016). However, from the global experience, it is noted that the integration of VAT in a nation’s economy leads to an increase in the GDP compared to other types of taxation.
Impacts on the County’s Major Industries
According to most of the financial experts, the UAE policy maker’s needs to create a balance between the agencies mandated with the collection of taxes and promote conducive settings for international investment (Simionescu & Albu, 2016). Application of the zero percentage on the tourism industry plays a significant role in enhancing the UAE tourism across the world.
Increase in the Government Income. According to numerous studies, the implementation of the VAT system in the country is projected to enhance the country’s economy and offer a new stream of income to the government. The revenue is mainly to improve the GCC economy which can facilitate employment and development of investments in the states. Considerably, the acquired income not only will assist in the creation of infrastructure but, will also aid in the stabilization of the nation’s economy (Jansen, Stoltz & Yu, 2013). Conformity to the tax guideline is projected to have non-monetary benefits to the country’s economy such as the liability management.
The study incorporated the use of the questionnaire in which three individuals were interviewed both from the business and administrative sector. The primary objective was to acquire the administrative and business personnel perception on the impact that will be created by the enactment of the VAT statute. According to the traders, the implementation of the VAT on the state’s commodities will lead to an increase in the product prices which will eventually cause inflation. Based on the views of the policy maker, the integration of the VAT system is a way of enhancing the nation’s GDP and improve the state’s revenues. The interviewees agree that the implementation of the law is a way of developing infrastructure and promoting employment in the country. The interviewed personnel insinuate that the introduction of the policy is an aim of expanding the economy since the system allows for the investment in business enterprises. Equally, the traders stipulate that the tax burden will be substantial to the companies and did not support the 5% VAT.
Based on the new taxation policy it is vital for the public to understand the regulation since it directly affects their livelihood. The authorities need to provide clarification to the citizens on its taxation model such as the most significant features of the arrangement like the zero-rating. Communication of the policy to the people and business owners and consulting on issues about taxation is essential in the application of the law. The government should develop an agency with individuals that are trained, skilled, and competent to aid in the administration of the statute.
The primary aim of the implementation of the 5% VAT on products is to enhance the development of infrastructure and increase the country’s investments. It is projected that the enactment of the policy will have a significant impact on the public and business owners. For instance, the 5 % tax will lead to an increase in food prices which will eventually cause a rise in the rate of inflation. Equally, applying zero-charge on the tourism industry not only promotes economic growth but also increases the number of tourists in the states. The findings show that the VAT rule is bound to affect the traders; hence, the government needs to offer clarity on its taxation model. The authority should integrate individuals with skills, understanding, and competent to help in the enactment of the statute.
Al Mehrezi, M. A. (2013). Effects of Implementing a VAT Collection System in the UAE as a Whole and Ras Al-Khaimah Emirate Specifically. University of Canberra.
Harrison, M. (2017). Taxation and the GCC States. Gulf One Lancaster Centre for Economic Research Report. Lancaster University Management School, Lancashire.
Jansen, A., Stoltz, E., & Yu, D. (2013). The targeting of zero-rated basic foodstuffs under value-added tax (VAT) in South Africa. Studies in Economics and Econometrics, 37(3), 87-104.
Mears, P. (2016). United Arab Emirates 2018 Vat Tax: The effects on expats in Country.
Simionescu, M., & Albu, L. L. (2016). The impact of standard value added tax on economic growth in CEE-5 countries: econometric analysis and simulations. Technological and Economic Development of Economy, 22(6), 850-866.
Zafarullah, M. (2018). Impact of VAT on UAE Economy. Asian Development Policy Review, 6(1), 41-49.
The interview was based on the following questions:
- What is the impact of VAT introduction to your company?
- Will the compliance burden be a challenge or not on your firm?
- Will the implementation of VAT avert recovery?
- Should UAE maintain its present business tax rate?
- Do you support or oppose the implementation of a VAT?
- What is the reason for your support/opposition?