Dubai: The impact of a value-added tax (VAT) system on consumers in the UAE may vary depending on household incomes and spending behavior, and how much will be levied on goods and services, analysts said.

Considering the purchasing power of residents in the country, a 3 per cent to 5 per cent VAT may generally be hardly noticeable, especially if the essential food items are exempted, but a tax rate of 10 per cent or higher is clearly seen to have a negative impact on consumer spending.

Those who love to shop for big-ticket items or upgrade their gadgets and cars more often than others will mainly bear the brunt of tax collection. As long as the VAT rate does not exceed 5 per cent and food essentials remain untaxed, low-income families have nothing to worry much about, according to the experts.

“If [VAT] is implemented at low levels, say 3 per cent to 5 per cent on luxury goods such as computers and cars, then the impact on low-income families will likely be negligible. [But] those who regularly purchase the latest smartphone or upgrade their car are the ones to shoulder a greater portion of the burden,” said Andrew Prince, financial planner at deVere Acuma.

“That said, even a VAT at 5 per cent on a Dh200,000 car would only increase the price by Dh10,000, which if spread over a typical loan tenure of five years, would increase the monthly payments by about Dh170.”

The introduction of tax reforms has long been discussed in the Gulf Cooperation Council (GCC) region. In the early 1990s, a feasibility study was conducted to test the implementation of corporate taxes and VAT.

Talks on the subject later fizzled out and it is only recently when economies in the region are facing budget deficits due to oil price decline that the proposal is again gaining strong interest.

Alp Eke, senior economist at the National Bank of Abu Dhabi (NBAD), said that a VAT rate of 5 per cent will be “negligible” or “slightly noticeable in the UAE.

However, he said that based on various surveys conducted in the United States and Europe, a VAT rate of 10 per cent or above would definitely have an impact on consumer spending.

“[This is especially true] on luxury items, such as spending on restaurants, electronics and entertainment.”

Prince said that introducing tax reforms in the UAE is essential since the country needs to find other revenue sources to sustain investment infrastructure and the well-being of its residents. “It is generally accepted that some form of taxation is actually a good thing, as it helps diversify away from reliance on hydrocarbons for revenue and maintains sovereign wealth,” Prince said.

“We saw recently the removal of subsidies for petrol as a perfect example of ‘balancing the books’.”

However, some businesses in the UAE expressed concern that the collection of VAT would discourage shoppers, including tourists, from opening their wallets.

Karen Patel, marketing manager of 2GIS Middle East, said the proposal could result in double taxation for visiting shoppers, considering that people who purchase imported goods are also liable to pay taxes once they travel back to their home countries.

“[The UAE] is among the most preferred shopping destinations in the world with a huge influx of tourists that contribute significantly to the GDP of the country. The biggest attraction, apart from being a world-class city is the tax-free economy for the tourists and the expat residents,” Patel said.

“The imposition of VAT will have a huge effect on the buying power of both the [residents and tourists]. It is well known that most tourists and residents will have to pay duty tax again on certain goods in their country of origin.”

To avoid burdening consumers, Patel said it would be a good idea to implement VAT in phases and exempt certain consumer goods.

Other companies who also deal with tourists  in the UAE expressed the same concern, adding that any tax collected could limit visitors' spending power.

“Any amount gone out of [tourists’] pockets is their expense, whether it is in the form of VAT or tax. This will really affect the spending power [of visitors who will be forced] to buy an alternative product with a lesser price, or postpone [or cancel] the purchase,” added Dinesh Joseph, senior manager for accounts at Fast Rent A Car, which caters mainly to tourists.