The UAE has been preparing for the introduction of value added tax (VAT) for the past one year with the Government creating a robust legal framework, necessary regulations and a competent tax authority to implement an all-new tax regime in the country for the first time in its history.
With just about a week to go for the rollout of VAT, government bodies and private sector entities are in final stages of preparations. Given the fact that the UAE is new to taxation, the VAT implementation has come with its fair share of apprehensions in the minds of all stakeholders. But as the deadline approaches, the concept is becoming clearer and the rollout is widely expected to be a smooth affair.
Taxation is a globally accepted practice of augmenting and diversifying government revenues. Although the introduction of tax instruments is a topic which was first discussed several years ago, it remained more in academic realms as GCC countries have long been financing their government expenses by means of oil exports and revenues. Persistently low oil prices over the past three years have brought considerable economic pressure on the GCC countries. This had led to an urgent need to diversify revenue streams.
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT or its equivalent, Goods and Services Tax, including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each step of the ‘supply chain’. Final consumers generally bear the VAT cost while businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
Although most expatriates living in the UAE are used to some form of indirect taxes in their home countries, the newness of taxation here has created some amount of unease among consumers and businesses. The introduction of a new tax in a region that is used to subsidies and absence of government levies comes with apprehensions about the mechanics of implementation, impact on economic growth, and inflationary pressures.
VAT being a consumption tax, it is expected to cause a modest increase in inflation. However, with some key components of the consumer price inflation basket remaining either zero-rated or exempt will mean that the percentage point rise in inflation directly from VAT will be far less 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 amount of initial hiccups until people get used to the new system. Going by the UAE’s track record, one can expect that the relevant government authorities will be lenient and patient until the public get used to VAT.