Value Added Tax (VAT) in UAE
Value Added Tax is a perspective that is yet to be implemented in Gulf Cooperation Council (GCC) countries, although an implementation of the same is expected to be effected in countries such as UAE, which is a member state of the GCC. A confirmation of the implementation of VAT in UAE came after IMF’s managing director gave encouragement to GCC to embrace taxation as one of the revenue generation avenues (Maceda1).
According to reports, VAT will be introduced in UAE by January 1, 2018, and it will be at a rate of 5 percent on all goods and services with the exception of education, health care, bicycles, and approximately 100 staple food items (John 1). It is expected that VAT together with other taxation forms such as corporate and income tax, which are yet to be implemented, will help boost UAE’s GDP, given that it has been compromised by fluctuation in global oil prices in recent years.
Several studies and literature have focused on VAT, giving detailed explanations of what it is, its implications on the economy, and its pros and cons. Keen and Ben (138) argues that VAT has spread to over 130 countries globally, and it plays a significant role in the generation of tax revenue, of which, it raises over 20% in most countries. The study goes ahead to mention that VAT has widely been adopted in North and South America, sub-Saharan Africa, Europe, and is now gradually being adopted in Arab countries. It is seen as the centerpiece of tax reform in several countries and has been one of the most important developments in tax administration and policy in recent years.
Crawford et al (291) define Value Added Tax as a kind of tax levied or imposed on the sale of goods and services by businesses, firms, or companies that are registered. This study states that VAT applies to both private consumers and other businesses, as it is one of the ways through which governments collect revenue. This study also highlights that VAT has been adopted by over 130 countries, with each of the countries having a specific reason for the adoption of the same. In the study, the focus is on the UK, which adopted VAT, as it was one of the preconditions for entry into the European Union (EU).
Schenk et al (10) argue that VAT is employed around the world in over 130 countries, and involves two independent taxes, which are joined with credit for tax on purchases, imports included, against the tax that is imposed on sales. This book argues that VAT is an indirect form of taxation that accounts for over 20 percent revenues in most countries.
Explanation of VAT System in General
VAT, also known as goods and services tax (GST), is a common way through which consumption tax is implemented in several countries. It is important to note that with the exception of the US, every other OECD country has VAT, which contributed to national revenue generation (Nicholson 3). VAT is similar to sales task in various ways, one of them being that in both cases, it is the end consumer that is taxed. However, VAT is different from sales tax in that with the latter, collection and remittance of tax, is to the government, and this occurs only once when the end consumer purchases a product.
Conversely, for VAT, collection and remittance of tax to the government occurs every time a product is purchased in the supply chain. The standard way for the implementation of VAT involves the assumption that a particular business must remain with a fraction of a product’s price once all taxes that were previously paid on the product are subtracted. It is essential for countries that have a VAT system to ensure that businesses are registered for VAT purposes, and these businesses can be either legal entities or natural persons.
Another requirement is that VAT registered businesses have to include VAT on services and goods that are supplied or distributed to consumers as well as ensure that VAT is accounted for at the taxing authority (Nicholson 3). One of the major implications of VAT is that it enhances the growth of GDP of various countries, as it provides an alternative platform for revenue generation.
The VAT System in UAE
According to reports, the UAE expects to implement a VAT system by January 1, 2018, at a rate of 5 percent on goods and services purchased by consumers, with the exception of 100 staple food items, and other services such as health care and education (John 1).
With its anticipated VAT system, the UAE will earn or generated revenues of between Dh10 billion and Dh 12 billion, during the first year of the system’s operation. Given UAE’s previous efforts to embrace economic diversification as well as good capital buffers, it is expected that the establishment of UAE’s tax system will not be a challenge (John 1).
UAE’s VAT system will serve as an alternative to oil as a source of revenue generation, and this is attributed to the fact that the government of UAE is gradually shifting attention from oil exports, which have been compromised by falling oil prices. Reports also indicate that once operational, UAE’s VAT system will account for 15-20 percent of national GDP (Maceda1).
Timeline of VAT System in UAE
Following an encouragement from IMF’s managing director, UAE and other member countries of GCC including Bahrain, Oman, Kuwait, Saudi Arabia, and Qatar, are expected to sign an agreement in June 2016, which will see them embrace a VAT system, and join the over 130 countries that already have the same system.
Once the agreement is signed, GCC countries will have the period from January 1, 2018, to January 1, 2019, to implement the VAT system. However, for the UAE, it is expected that it will implement the system as of January 1, 2018, and it will later be followed by other GCC countries.
After implementation, it is expected that the period between January 1, 2018, and January 1, 2019, will see the generation of an estimated Dhs 12 billion, which will serve as an alternative to oil exportation, which is UAE’s primary source of revenue.
VAT implementation in UAE
According to the UAE Minister of State for Financial Affairs, the implantation of VAT is expected to take place as from January 1, 2018. UAE will implement VAT at the rate of 5 percent as per the agreement with other GCC member countries. There are several conditions that have to be met by key stakeholders to ensure effective and smooth VAT implementation in UAE (Bouyamourn 1).
First, the private sector, which is without a doubt a key player in UAE’s economy, will have to prepare for compliance with tax rules, and this is one of the reasons for the ample time given before the implementation of VAT is implemented (Bouyamourn 1). VAT implementation will target all goods, services old to consumers with the exception of services such as education and health care, approximately 100 staple food items, and bicycles. VAT implementation in UAE will be seen as part of the efforts and commitment by the UAE government to achieve the objective of diversifying the economy, given the sharp and drastic decline in oil prices, which has for a long time accounted for a significant percentage of UAE’s GDP.
VAT implementation in UAE will not be an easy task, and this is highlighted by the fact that it is one of the countries whose citizens are used to the absence of tax and subsidies provided by the government. As such, one of the ways of achieving successful VAT implementation will be to ensure that citizens have and understanding of the fact that pricing of public services and commodities is vital for any government that seeks to achieve economic growth. Another way through which VAT would be implemented effectively and smoothly in UAE is putting in place viable pricing mechanisms.
Impact of VAT on business in UAE
The implementation of VAT in UAE will not only affect consumers but businesses as well, and in fact, concerns and questions have been raised regarding the cost of doing business after the implementation of VAT system as from January 1, 2018 (Bouyamourn 1).
As such, one of the impacts of VAT on businesses in UAE is that the cost of operating and doing business will increase significantly. Besides, upon the implementation of the VAT system, entrepreneurs, and other business owners will be forced to acquaint themselves with the new system. It should also be noted that once the anticipated VAT system is implemented, it might discourage business individuals from recruiting or hiring employees due to the already mentioned increase in the cost of operations.
It is also expected that VAT would compromise the growth and expansion of SMEs in the UAE, which does not acquire significant profits from their operations or activities. Moreover, after the implementation of the VAT system, the failure by businesses and organization to comply with the accompanying tax laws would attract severe penalties, or in extreme cases closure of operations in the case of noncompliance tax laws.
Impact of VAT on Imports and Exports in UAE
Currently, in the UAE, there are no import or export taxes, and this has in the past boosted the number of commodities and services exported and imported by entrepreneurs in the country. However, this could change with the anticipated implementation of VAT system, which in extension would have a significant impact on exports and imports (Slemrod 187).
Reports from sources such as Touche and Deloitte indicate that a VAT rate of 5 percent on goods and commodities will result in an increase in the general price level and a significant rise in the rate of inflation. In fact, with the VAT system in UAE, the rate of inflation is expected to rise from 0.4-1.4 %, and this is likely to have adverse impacts on imports and exports in UAE (Bouyamourn 1).
Moreover, it is imperative to note that heavy industries are frequently involved in exportation and importation of commodities and services. Such industries often require significant or substantial capital investment when it comes to the purchase of machinery or plant. As such, with the implementation of a VAT system in UAE, the amount of VAT sustained by heavy industries in the country could be significant, and thus, both export and import businesses in the heavy industry sector will be in a constant refund position (Slemrod 188). Usually, VAT is not imposed on heavy industries as taxes could be recovered as input tax.
Impact of VAT on residents in UAE
The VAT system is widely accepted and supported because of the view that it taxes consumption rather than income, and thus, individuals’ saving capability is promoted. Thus, with a VAT system in UAE, residents will be in a position to save more as taxation will be on consumption and not on income.
Besides, a VAT system would enhance economic and GDP growth in UAE and this will result in an improvement of working conditions as well as an increase in employment opportunities for the UAE residents.
Most importantly, an implementation of a VAT system in UAE will see wholesale and retail stores increase prices of various commodities and services while seeking to absorb the tax burden. Though this, the tax burden will be passed on to end consumers, who in the real sense are UAE residents.
Advantages of VAT in UAE
First, VAT in implementation in UAE will promote tax compliance, and this is because it will hinder fraud and help in the creation of a trail that will assist in the identification of fraud in any case it occurs.
Second, VAT will play an integral role in the promotion of savings and investment, and this is because taxation will be targeted at consumption rather than income. In most cases, taxation on income is higher than that for commodities and services, although UAE is yet to introduce income tax (Alexander 68).
Third, a VAT system in UAE will result in economic efficiency and fairness although the latter has been subjected to debate. It is expected that significant amounts of revenue will be generated through VAT, and this will boost economic structures resulting in economic efficiency and fairness.
Disadvantages of VAT in UAE
First, with the implementation of VAT, which is viewed as a money machine, the government will progressively collect more revenue, and this could pave the way for corruption, overspending, and misappropriation of public funds (Lang 67).
Second, VAT is often accompanied by a regressive nature, which means that the underprivileged, especially the poor might be seriously destabilized by such as system; hence, this is disadvantageous.
Third, once implemented, the VAT system may not be easy to administer as multiple firms or companies will be obliged to complete tax returns, a perspective that will complicate the entire system (Lang 67).
How VAT will help in development in UAE
The UAE government estimates that through an implementation of VAT, at a rate of 5 percent, approximately 0.2-0.4 percent of GDP will be raised. Without a doubt, a significant increase in the GDP of UAE will pave the way for economic development, and this might see a rise in the number of infrastructural and other economy-related projects in UAE.
However, a rise in the GDP will be dependent on the categories of commodities and services that are exempted from VAT taxation. Besides, the manner in which the tax will be collected will also determine whether the GDP increases or not. In the real sense, a VAT system implementation in UAE will help raise more revenue as compared to other taxation forms or types, and thus, development is guaranteed upon implementation of VAT in UAE (Lang 68).
Furthermore, it is expected that the implementation of a VAT system in UAE provide an alternative source of revenue, and this will help the country diversify from over-reliance on hydrocarbons such as oil for revenue. The diversification of the economy will play an integral role in the economic development of UAE.
How effective VAT will be in UAE
In essence, the effectiveness of the VAT system in the UAE will be evident in the significant strides that will be made economically. The system will be effective as it will provide an opportunity to move away from UAE’s current over-reliance on revenue from tariffs and other charges through offering a long term, more predictable, and sustainable source of tax revenue, which will be broad-based (Alexander 69).
It is also important to note that VAT will be effective as it will speed up and promote the growth of the country’s GDP, and by extension, the economy.
How VAT will support the public budget of the UAE Government
Currently, the UAE government relies more on revenue collection from oil exportation, although this has been affected by a significant fall in oil prices from approximately $115 per barrel in 2013 to $50 per barrel in 2015. As such, revenue collection from oil exportation supports only 30 percent of UAE’s budget, and this means that finding other revenue sources is the only way out.
It is expected that after its implementation as of January 1, 2018, the VAT system will help generate between Dh 10 billion and Dh 12 billion, and this will account for or support approximately 20 percent of the public budget of the UAE government. Besides, as of 2015, UAE ran a fiscal deficit of 2.3 percent, and this might only be solved in future through the implementation of other alternatives such as a VAT system.
As discussed above, VAT implementation in the UAE as of January 1, 2018, is expected to have myriads of benefits and weaknesses at the same time. Currently, Value Added Tax (VAT) is a perspective that is yet to be implemented in Gulf Cooperation Council (GCC) countries, although an implementation of the same is expected to be effected in countries such as UAE, which is a member state of the GCC. It was confirmed that VAT will be implemented in UAE and other GCC countries after an agreement among the countries and an encouragement IMF’s managing director, who convinced the GCC countries on the need and importance of embracing taxation as one of the revenue generation avenues. As mentioned above, the UAE will earn or generate revenues of between Dh10 billion and Dh 12 billion, during the first year of the VAT system’s operation. Given UAE’s previous efforts to embrace economic diversification as well as good capital buffers, it is expected that the establishment of UAE’s tax system will not be a challenge.
The system will have positive and negative impacts on the residents of UAE, the economy, and the country in entirety. Among the positive impacts, the VAT system will promote tax compliance; will play an integral role in the promotion of savings and investment, and this is because taxation will be targeted at consumption rather than income, and will result in economic efficiency and fairness. However, among the adverse impacts of the VAT system in UAE, it would enable the government to progressively collect more revenue, and this could pave way for corruption, overspending, and misappropriation of public funds. The underprivileged, especially the poor might be seriously destabilized by such as system, and it may not be easy to administer as multiple firms or companies will be obliged to complete tax returns.
With the eminent implementation of the VAT system in the UAE, several measures or interventions must be put in place to ensure that the process takes place smoothly and effectively. First, it is recommended that business should update their cash accounting schemes as well as record keeping in time to facilitate a successful implementation of the same when the time comes.
Second, it is recommended that corporations should re-organize and re-structure themselves in the given duration to prevent last-minute rushes that may jeopardize the implementation of the VAT system in UAE.
Third, businesses in UAE must ensure that VAT is incorporated into their accounting systems, and they have to keep records of the same in preparation for VAT implementation.
Fourth, organizations should test the capabilities of their IT systems, as these will play an integral role in the implementation of the VAT system.
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