Obaid Humaid Al Tayer (right) and Abdul Rahman Al Owais, Minister of Health and Prevention and Minister of FNC Affairs, sharing a light moment during the FNC Session in Abu Dhabi. Image Credit: Abdul Rahman/Gulf News

Abu Dhabi: There will be no increase in salaries to cope with the levying of the value added tax (VAT), Obaid Humaid Al Tayer, Minister of State for Financial Affairs, told the Federal National Council on Tuesday.

Al Tayer said the tax will have minimal socioeconomic impact on people and investments.

“The social impact of VAT in the first year will be 1.42 per cent and so it will vary from one person to another, based on his or her personal spending. For people with monthly spending of Dh5,000, the impact will be Dh70 only, while those who spend Dh10,000 will be charged only Dh140 as a result of levying the VAT,” Al Tayer said.

In the medium term, the impact of the tax will be 0.11 per cent and as the economy grows it will go further down, Al Tayer added.

The minister told reporters after the House’s session that the government is ready for implementation of VAT, while the “readiness of the businesses is their own responsibility”.

Al Tayer told the House that the impact on current and future investments in the country is expected at 0.68 per cent, adding that VAT is aimed at “achieving financial sustainability” for the government.

The minister was answering questions about the implementation of VAT from the beginning of next year.

Al Tayer affirmed there will be no delay of implementation for any businesses, saying banks and other big businesses have systems that can deal with VAT, they just need to activate these systems.

“No company will be given more time to start VAT implementation, and none of the companies are exempted from VAT,” Al Tayer said.

Calling implementation of VAT “a historical move”, Al Tayer said the tax will provide the UAE with a new stable source of revenue, which will continue to be utilised to provide high-quality public services, in keeping with the 2021 and 2071 vision of the country.

Members of the Federal National Council raised with Al Tayer the concerns of residents and businesses over VAT set to be levied as of January 1, 2018.

Dr Saeed Abdullah Al Mutawa, a member from Sharjah, put two questions on the impact of VAT on the national income and the government’s plan to offset inflationary effects of the tax and whether salaries of employees will be increased.

The UAE will be levying VAT at the rate of 5 per cent.

The House, however, passed a motion to offset the impact of VAT on beneficiaries of social security and pensioners, to help them cope with the social and economic impact of the tax.

The country’s average inflation rate was 4 per cent in 2015. The inflation rate is expected to be around 2.5 per cent this year given the firming US dollar and a decline in imported items coupled with the slowdown in transportation and housing rents.

VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. A limited number of exemptions may be granted.

As a result, the cost of living is likely to increase slightly, but this will vary depending on an individual’s lifestyle and spending behaviour. If an individual spends mainly on those things which are relieved from VAT, he is unlikely to see any significant increase.

Hamad Ahmad Al Rahoumi, a member from Dubai, put three questions on the banks’ demands to delay levying of VAT and change in retirement laws to give Emirati pensioners annual inflation-linked rises.

The government requires businesses to be clear about how much VAT an individual is required to pay for each transaction. Based on this information, individuals can decide whether to buy something.

Marwan Ahmad Bin Galita, First Deputy Speaker of the House, put a question on educating members of the public about the new tax.

The introduction of VAT could push the cost of living and cost of doing business higher in the Gulf Cooperation Council (GCC) region, according to investment professionals and finance experts.

A VAT rate of five per cent could help generate additional revenue equivalent to about 1.5 per cent of the country’s gross domestic product, according to International Monetary Fund (IMF) estimates.

Other experts, however, say VAT will decrease the consumer purchasing power and hence suppress demand, and thus be anti-inflationary. Whether the introduction of VAT will increase inflation or not, however, depends on other factors such as economic growth and interest rates, they say.