Dubai - Dh12b additional revenues for UAE in first year after implementation of VAT
Published: Mon 18 Jul 2016, 12:00 AM
Updated: Wed 20 Jul 2016, 2:13 AM
Value Added Tax (VAT) will be another source of raising revenues for governments in the Gulf Cooperation Council (GCC) and it is estimated that the UAE will generate more than Dh12 billion additional revenues in the first year after implementation of this new tax.
GCC countries have decided to implement taxation as part of the governments' efforts to diversify revenues in the context of sharp decline in oil prices. The International Monetary Fund has been recommending fiscal consolidation in the GCC through diversification of government revenues and reduction of subsidies.
VAT will be introduced in the UAE along with other Gulf countries from the beginning of 2018 at 5 per cent. Indirect taxation in the form of VAT in low single digits is the most viable option for GCC states in the first stage of taxation as implementation of direct taxes requires a fairly well-developed institutional framework.
Last month, finance ministers of all GCC countries approved VAT in the region. Its framework agreement is expected to be finalised during the next meeting of the finance ministers in October.
Companies in the UAE that report annual revenues of over Dh3.75 million will be obliged to be registered under the GCCVAT system, said the Undersecretary of the UAE Ministry of Finance, Younis Al Khoury on June 15.
Al Khoury also confirmed that companies whose revenues fall between Dh1.87 million and Dh3.75 million will have the option to register for VAT during the first phase of the VAT implementation.
He also mentioned that it will eventually become obligatory for all companies to be registered under the system when it is rolled out in the second phase, regardless of the reported revenues. The roll-out date of the second phase of the implementation is still to be decided.
New epoch in fiscal reforms
"VAT will provide the UAE a cushion against economic uncertainty and boost the fiscal side of the balance sheet," said Shan Saeed, chief economist at IQI Holdings Malaysia. "VAT will buttress the government's effort to broaden the tax base in the country to bring about economic reforms with more funds in the kitty. VAT brings more people in the tax bracket in the UAE economy. It would increase Tax to GDP Ratio and help the government in economic and structural reforms moving forward."
Dr Nasser Saidi, president, Nasser Saidi & Associates, explained that revenue diversification is the key factor behind the implementation of VAT.
Dr Saidi added: "The UAE and other GCC countries are overly dependent on oil revenues and have been severely affected by the 60 per cent fall in oil prices. Similarly, the GCC countries have been reliant on international trade taxes (customs) which will have to be phased out in accord with trade agreements."
It is expected that implementation of a 5 per cent VAT will raise revenues by about 1.5-2 per cent of GDP. "This should be in conjunction with a reduction in the large number of distortionary fees, stamp duties and other levies which do not raise much revenue but increase transactions costs and the cost of doing business," he explained.
Atik Munshi, partner at Crowe Horwath, UAE, said UAE businesses in general lack financial discipline and the introduction of VAT will obviously bring added revenue to the government exchequer and thus help the decline in the oil revenues to some extent apart from bringing in the financial discipline required.
Nimish Makwana, chairman ICAI Dubai Chapter, said introduction of taxation in a region that is used to subsidies and absence of any tax require lots of preparation. "It is time people are made to understand that public services need to be priced. Options are limited for governments. Either a viable pricing mechanism needs be implemented to fund public services or governments can resort to big borrowings, which is not sustainable in the long term," Makwana explained.
Emirates NBD in a research note mentioned that VAT does not distort investments, which is a very valid point in the region where governments are pushing ahead with diversification plans and looking at strategies to attract private sector investments to create jobs. It added that from an administrative stand point both application and collection of taxation through VAT is less complex, more efficient, and can generate higher revenues.
Indirect and direct taxes in UAE
Apart from very limited sectors which are prone to tax like banking and oil and gas sectors, most sectors are currently exempt from direct tax though with the introduction of VAT, UAE is taking its first step of introducing the tax regime in the country.
"Further introduction of direct taxes cannot be ruled out in the forthcoming future. The business community of UAE will need to take this in their stride Atik Munshi.
abdulbasit@khaleejtimes.com
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