VAT’s impact on UAE’s consumer price inflation will be limited

Dubai: The impact of the introduction of value added tax (VAT) in the UAE from January 1, 2018 on annual inflation in the country is expected to be only a fraction of the proposed tax rate of 5 per cent, according to the International Monetary Fund (IMF), tax practitioners and economists.

The UAE has confirmed the implementation of VAT starting next year. The country is already in advance stage of tax roll out with registration process to begin shortly.

“UAE firms will be able to begin registering VAT from the middle of next month. Companies will be able to register for VAT through the Federal Tax Authority’s own website from mid-September,” said Khalid Ali Al Bustani, the director-general of the Federal Tax Authority, earlier this week.

While about 300,000-350,000 companies in the UAE will be impacted, the whole population of the country will be subject to the new tax system.

VAT being a consumption tax, tax burden is expected to reflect on the prices and consumption. The impact of VAT on inflation and government revenue will vary depending on the proportion of consumption in the economy and how much of the consumption base is captured by VAT.

Analysts say with some key components of the consumer price inflation basket in the UAE remaining either zero-rated or exempt will mean that the percentage point rise in inflation directly from VAT will be far less than the tax rate, especially as residential housing tends to have the largest weighting in the inflation basket.

Food items with a high weighting, and governments considering only limited number of exemptions, prices are expected to surge and will be a major component of price increase linked to VAT.

Although the final list of exempt items is not yet out, the Ministry of Finance has indicated that most food items will fall under the 5 per cent VAT rate, including basic goods. Imported goods and services will also be taxed at 5 per cent. VAT will also be applicable to utility bills (electricity and water) as well as mobile telephone and internet bills.

“We estimate that VAT could add about 2.7 to 3.7 percentage points to headline inflation in the first year post introduction. However, the introduction of the tax in other countries shows that it can take a few months for the potential rise in prices to fully filter into the inflation data,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank (ADCB), in a recent note.

A sudden spike is unlikely because of the price scrutiny that is expected to follow the introduction of VAT; competitive pressures and a potential slump in consumer spending as a result of new taxes.

According to the latest inflation figures from the IMF, consumer price inflation in the UAE eased to 1.8 per cent from 4.1 per cent in 2015, reflecting softer domestic demand and declining rents. Despite the introduction of VAT the IMF projects an annual average inflation of 2.9 per cent in 2018 and 2.5 per cent in 2019.

“While the introduction of a tax may seem daunting to consumers and businesses alike, the overall impact for consumers is less than the usual annual inflation rate,” said David Stevens, VAT Implementation Leader at global consultancy firm EY.

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