We all get that cringe-worthy feeling when we have to shell out some extra sterling for a nice dinner we have just had on account of indirect tax. So, it is safe to presume that, we all have a general idea about the Value-Added Tax we have been paying. But this was not the case in Dubai till now as UAE is going to join the club by implementing VAT from 1st January 2018. Now that VAT is going to be a part of your daily expenses, let’s discuss it and also understand how it is going to affect businesses and individuals.
What is VAT exactly?
VAT is basically an indirect tax that is levied on the final consumers for the goods or services they consume, and it is therefore also called consumption tax. Seems simple, doesn’t it?
What will VAT mean in Dubai?
This is the question of the hour. Though it has not been implemented yet but special committees have been already formed to study and speculate the impact it would have on the economy as well as the socio-economic consequences; framework has been laid off. Once the legislation passes the act which is confirmed to be implemented from 1st January 2018, every citizen of Dubai would have to pay a 5% value-added tax on goods and services that they consume. There are exemptions to this rule, but we will talk about them subsequently.
There are various reasons that are being believed to be the driver for this decision for UAE to implement VAT.
-To bring about balance in the economy
-A source of income for the government
-Recommendation by IMF
-For stabilizing UAE’s currency i.e. Dirham
There have been speculations going on over the implementation of value added tax as the government was only dependent on the export payments of oil and gas until now which are very volatile in nature, with all the fluctuations.
Coming to the exempted sectors, these include education, healthcare, social services and also several food items which are of necessity. So, it is not actually a cause of worry to the citizens of Dubai as it would be fair revenue that is going to get generated for the government through the value-added tax you will pay on your purchases and that too judiciously.
Impact on citizens
Let’s talk about its impact on citizens, who are going to play the most vital role in it. It is implied that implementation of VAT would increase the cost of living in Dubai and also simultaneously impact businesses. But considering the fact that basic food items such as fresh fruits, wheat and cereal flours, coffee and tea, sugar, infant milk foods, uncooked pasta and a range of other basic food items are exempted, the mere 5% on luxury items would hardly impact lavish lifestyle. So, we can safely say it would hardly burn a hole in your pocket.
Impact on business
Now coming to business, it is considered to have a deeper impact on their numbers. Especially the small businessmen and entrepreneurs and expats who have majorly come to Dubai for business due to its taxation free environment. As VAT would be levied on each stage of supply, special care has been taken for its correct implementation as the final price would fall on the consumers. We will have to forgo the short-term hindrances offset it is bringing, keeping in mind the long-term benefits VAT will bring to the economy.
To conclude, the implementation of a new tax system is never a quick or easy process, there are numerous complexities that hinder the system, and it is also expected. But the work doesn’t stop with its implementation. It is vital to monitor and regulate its fair execution and adherence regularly. Though, it is expected that 5% VAT wouldn’t have much impact on citizens since its exemption on basic food items is in generous considerations, which would, in turn, safeguard the middle and lower middle class; but its impact on business, especially the SME’s would be much broader.