The beginning of 2018 was marked by an important event for the economy of the UAE – the introduction of the VAT. 5% VAT was introduced by the government to diversify revenues and to reduce the potential negative impact of the shock of oil prices. All GCC countries have discussed the introduction of VAT but only one of them, Saudi Arabia, has made the change along with the UAE.
VAT is uniform for all kinds of companies. About 75% percent of all enterprises have already registered for VAT. However, the level of tax compliance will be clear by the end of the year 2018. Revenue diversification is a necessary measure which is in line with the government’s intention not to rely too heavily on oil.
Tax compliance will be achieved with the help of strict control – there are penalties for the evasion of taxes. The expected additional revenue will probably reach about 2% of GDP value. However, in case of less than total tax compliance, this figure might be lower.
Before the introduction of the VAT, there have been discussions about possible inflation that might immediately follow. Fortunately, the level of inflation was moderate reaching 2.7 %. One of the most important factors that help to achieve this balance is zero corporate and income taxes in the UAE.
Impact of VAT
Another obstacle blocking inflation is the real estate market. The housing sector remained almost intact regarding VAT since the residential sale is still exempt from tax. The same refers to education and healthcare – these segments are tax-free.
However, some sectors have experienced the impact of VAT introduction. So where have prices increased? These are areas like transportation, which might result from the fall in consumers’ demand for vehicle purchase. Experts say that despite the introduction of the VAT, output costs have remained the same, though, input costs have increased, causing, in particular, the price increase in transportation.