This post was originally published on 25 February 2016
The UAE will implement value added tax (VAT) at the rate of five per cent from January 1, 2018, said Obaid Humaid Al Tayer, UAE Minister of State for Financial Affairs.
The minister was speaking to reporters after a joint press conference on Wednesday with Christine Lagarde, Managing Director of the International Monetary Fund (IMF), in Dubai.
Other GCC countries to announce dates soon
GCC countries have recently agreed that they will introduce VAT at a rate of five per cent in 2018. The framework agreement on the implementation of VAT across the GCC is expected in June this year.
“Once the framework agreement on implementation of VAT is reached, GCC countries have time from January 1, 2018 to January 1, 2019 to implement VAT,” said Al Tayer.
The minister said each country has the flexibility to introduce VAT within this time frame. “Other countries can implement [at the same time] or take a later date of implementation, of January 1, 2019,” Al Tayer said.
Which means that while the UAE is keen on 2018 implementation, it is possible that some other GCC peers implement it at a later date (no longer than a year later, though).
Dhs 12 billion estimated revenue from VAT
Value added tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production, starting from raw materials to final product.
The UAE will impose five per cent VAT while exempting 100 food items, healthcare and education.
In the first year, the country is expected to generate Dh12 billion from tax revenue.
UAE says no to income tax – for now
The UAE Finance Ministry also confirmed that it is not considering implementing a personal income tax on individuals, according to Arabic daily Emarat Al Youm.
Al Tayer said that the UAE hasn’t undertaken any study on personal income tax so far and said that no such proposal was under consideration.
He added that the current priority of the Ministry was putting in place the infrastructure required for the implementation of VAT.
The IMF’s Lagarde had, earlier this week, reiterated the Fund’s taxation advice to the Gulf Cooperation Council (GCC), which included implementing VAT as a first step towards generating higher and more reliable revenue streams. She also advised the region’s governments to have the tax infrastructure ready for the imposition of personal income taxes.
Compared to VAT, corporate income tax (CIT) is more likely to act as a disincentive to businesses considering investment in the region and more negatively impact GDP growth. A personal income tax presents an obvious challenge to the tax-free branding that has served the region so well in the past.
GCC countries have decided to implement taxation as part of governments’ efforts to diversify revenues in the context of sharp decline in oil prices.
The IMF has been recommending fiscal consolidation in the GCC through diversification of government revenues and reduction of subsidies.
In fact, the IMF is only one among other international bodies that have been advising the UAE and the rest of the GCC countries to introduce taxation among several options for the government to strengthen their revenue base in order to minimise dependence on the fluctuating global oil price.
How will this affect your daily life?
A value-added tax (VAT) is a fee assessed against businesses at each step of the production and distribution process, usually whenever a product is resold or value is added to it.
A VAT is levied on the difference between the purchase cost of an asset and the price at which it can be sold (i.e., the amount of value added to it).
Producers and distributors typically pass the cost of the VAT on to the final consumer in the form of price increases.
Tax is added to a product’s price each time it changes hands until delivery to the customer takes place, when the final tax is paid.
Implementation of VAT means, your shopping will be more expensive. However, the GCC VAT rate of 5% is still very low by worldwide standards.
Hungary has the highest VAT rate in the world at 27 per cent, followed by Iceland at 25.5 per cent, and then Croatia, Denmark, Norway and Sweden at 25 per cent.
In UAE, VAT has been exempted for 100 staple food items, healthcare and education. So the effect on day-to-day life will be low. However bigger purchases like automobiles and electronics will become costlier.