Vatman (and robbin'?)

The bad

Don't introduce it!", said Arvind Nair, COO of Jumbo Electronics when asked what he thought the government should do with Value Added Tax (VAT).

This is a country whose competitiveness has been based on low margins but a high volume of sales, according to Nair. "VAT threatens that."

As the chief operating officer for Jumbo, a consumer electronics and IT retailer, Nair is particularly sensitive to the effect of any rise in the cost of doing business.

Not only are margins in consumer electronics retailing tight, but cost increases cannot easily be passed onto consumers. Customers compare prices locally, internationally and increasingly on the internet.

Nair has three principal concerns. Tourists have been the main driver for growth in the emirates.

"Dubai in particular has built a reputation as a great place to buy goods. If you went to Dubai Duty Free they could show you the figures. Gold, liquor then electronics drive the sale of goods. People buy because, without VAT, goods are cheap.

"If VAT is introduced how will that affect the competitiveness of Dubai versus, for example, Singapore? The government needs to think about this," he says.

For Nair the government should not introduce a new source of funding if by doing so they undermine another.

Customers can claim back VAT at the airport. According to Nair, however, "it's all too much hassle. Money never really gets refunded. It's a major source of tourist inconvenience."

Consider also smaller exporters and re-exporters. There is, Nair says, a large trade out of Dubai.

"Traders come from around the world but particularly less developed markets such as Africa. Dealers will come to Deira, buy half a container of goods, and ship them out."

These people will struggle with the idea of refunds, Nair argues, and losing them would be serious. While individual traders are small, the sum of their parts is considerable.

There is also the UAE's "porous border". Goods flow in and out of the emirates easily. It could be, Nair observes, that those companies operating legally and paying the VAT may be burdened more than others.

The good

"We think it's a good idea".

Steve Brice, Economist at Standard Chartered Bank, sees the overall macroeconomic big picture. And he likes it.

"[It] probably goes against what most people are saying, but overall the negatives are negligible, the benefits seriously good. The key question is where will the money go? "If to the regional emirates, that is the best possible scenario. It would give each emirate greater forecasting ability in terms of revenues and another source of domestic income."

Brice does not see an inflationary effect at all. "It will be a one-off price level shift. The overall impact on the basket of goods will not be dramatic. But it will offset declining revenues for government from lost custom tax."

Companies will not lose competitiveness, Brice believes, since they can claim VAT paid back.

"What's more, if you are going to do introduce VAT, do it now, while the economy is booming", says Brice. It's more painful in a downturn. "It's what they did in Japan. It wasn't good."

While the UAE has done better than most to diversify its reliance away from oil, it's worth reminding ourselves, says Brice, the country is still two-thirds dependent on oil. VAT will offer a diversified means of funding.

The indifferent

"It won't make any difference", according to EFG Hermes analyst Hany Genena.

"You're kidding yourself if you think there are no taxes in Dubai. When you stay at a hotel, or buy a drink, you are paying taxes and hefty ones too," he told Gulf News.

Banks pay a rate of 20 per cent corporate income tax; there are tariff rates on imports; oil companies pay a tax; a type of VAT is already paid in restaurants as well... Etisalat pays 50 per cent of its profit to the government."

There is a perception issue to be tackled. But ultimately "people look at the headline rate, and there will still be no income tax in the UAE".

Plus "look at the branding of Dubai. 10-15 years ago it sold itself as tax-free, now it sells itself as a great place to be, and, oh, by the way, there's no tax. That's a fundamental change."

And finally ...

All three mentioned the impact in generating more and better data for the economy.

If companies have to file a tax return in the UAE they do not at present it will increase visibility and leave a much better audit trail.

For the business community that has long called for more and better data, that's a bonus, isn't it?