Putting an end to all speculations, the UAE rolled out the value added tax (VAT) in the UAE on January 1, 2018, for the first time in its history. Despite a number of concerns regarding the tax readiness of businesses and relevant government agencies, the Federal Tax Authority (FTA) met its deadline without any major hiccups in the introduction of an all-new tax system.

The UAE has been preparing for the introduction of VAT for the past one year with the government creating a robust legal frame work, necessary regulations and a competent tax authority to implement the new tax.

The preparations for VAT launch in the UAE came with its fair share of concerns, particularly regarding clarity in law and getting businesses and their processes and personnel ready for the tax roll-out. The systematic and meticulous approach to creating a legal framework and setting up an implementing authority led to the introduction of VAT on the deadline.

Taxation is a globally accepted practice of augmenting and diversifying government revenues. VAT is one of the most common types of consumption tax found around the world with more than 150 countries already having implemented either VAT or its equivalent, the Goods and Services Tax (GST).

The introduction of tax in the country marks a new beginning in the participation of general public — both residents and Emiratis — in shouldering the responsibility of public expenditure. Persistently low oil prices over the past three years have brought considerable pressure on the Gulf Cooperation Council countries, including the UAE, to keep their budgetary spending under control while maintaining a healthy economic growth. This trade-off of conflicting objectives has called for the urgent diversification of government revenue streams.

While the relatively low tax rate of 5 per cent, combined with a liberal doze of zero-rating and exemptions on a number of supplies, taxation in the UAE in its current form is not going to exert any unreasonable pressure on the purchasing power of people. However, VAT being a consumption tax, it is expected to cause a modest increase in prices with far less inflationary impact than the tax rate.

As for businesses that are integrating VAT into their invoicing, accounting and auditing systems, it is likely to come with some initial difficulties until people get used to the new regime. However, VAT as a first step towards getting the public involved in financing government budget is clearly a step in the right direction towards sustainable public finance of the UAE.