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VAT in UAE: Will middle class feel taxed?

If there's one salary bracket that would be impacted the most by vat, it's the mid-income residents. But don't worry, there are ways to help ease the burden

The implementation of value-added tax (VAT) will have the biggest impact on the UAE's middle class earning around Dh20,000 a month with the highest increase in cost going into buying food items, according to residents and auditing professionals.

"I feel people with below Dh5,000 income will have less impact because they are already aware about their income level and consume less. The middle class will have the highest impact who are earning less than Dh30,000 because their food and other related costs will go up," said Naveen Sharma, chairman of the Institute of Chartered Accountants of India (Dubai Chapter).

Since the UAE is an open economy, Sharma believes that not all of the five per cent VAT will be passed on to consumers and half of it will absorbed in the supply chain from manufacturing to warehouses to retailers.

Your handy guide to VAT in UAE: What will change and what won't

As part of the GCC-wide agreement, the UAE will impose five per cent VAT from 7am on January 1, 2018, on foods electricity and water bills, gold jewellery and a number of other items. However, certain items such as medicines and school tuition fee have been exempted.

Pankaj Mundra, former chairman of the ICAI Dubai Chapter, said somebody spending Dh5,000 has to spend Dh5,250 after VAT from next year - so a little bit of costs will go up.

Mundra suggested that corporates should take steps as inflation goes up by adjusting the salaries of employees earning between Dh5,000 to Dh10,000 because the net saving of these people is less than the middle- and large-income group.

"The government and corporates should take steps to adjust VAT in their increment salaries. This happened in 2006-07 when the rents were shooting up in Dubai. All the companies and banks adjusted and gave VAT increments. My suggestion is that the people with salaries less than Dh10,000 should be considered for VAT allowance in their salaries from January next year," Mundra added.

Firms plan to hike salary or VAT

Waqar Mohamed, managing director of First Select Employment Services, a subsidiary of G4S UAE, said a number of companies have put in place plans to increase the employee salaries to compensate the VAT impact as part of inflation. This increase in salary would depend on a number of factors some of which are employee performance, length of service and even an organisation's retention strategy.

"When such taxes are introduced, the employee's initial reaction is to ask for a salary increase to offset the tax or hunt for a new employer that offers a higher salary."

Mahesh Shahdadpuri, CEO of TASC Outsourcing, said businesses realise that salaries must keep pace with the overall cost of living. However, with accommodation and public transport being exempt, school education and preventive healthcare being zero-rated; the impact of VAT on cost of living is yet to be ascertained.

"Various other indicators such as decline in rental rates may further soften the cost of living impact. Most businesses are waiting to understand the full impact of VAT before making any salary revisions, but some have decided to go with some minor revisions anyway," he elaborated.

Suhail Masri, vice-president of employer solutions, Bayt.com, said given the introduction of the VAT tax system in the GCC, it is fair to expect the number of jobs relating to finance and accounting to increase. Governments, accounting firms and businesses will require the skills of specialised tax accountants who are competent in incremental and surplus-value-based taxation.

Food eating into savings

Mundra also endorsed Sharma's views that food will have biggest impact on residents' expenditures.

"If the water and electricity bill of small and mid income residents is around Dh1,500, the impact of VAT will be less than Dh100, which is not big. However, food will have a big impact for those people who are spending between Dh5,000 to Dh7,000," Mundra said during an interview. With regard to impact of VAT on education, Mundra noted that residents earning less than Dh10,000 generally have their families back home so it'll not impact them. And people earning higher salaries can afford VAT cost hikes related to their kids' school.

Sunita Sharma, a Dubai-based realtor and housewife, feels that VAT is going to make a huge impact if companies don't increase salaries. Even among women, VAT, she pointed out, is a hot issue indeed as they discuss increase in their club memberships, kids' schools bus fees as well as buying cars before December to avoid the additional cost of VAT.

Meanwhile, ICAI chairman Sharma noted that residents need not panic as the UAE has one of the lowest VAT rates at five per cent.

"What is required is awareness. With the introduction of VAT, the economy will grow because the government will have more revenues and the infrastructure - which is already world-class - will further improve. In two to three years time, good amount of money is going back to the government so the economy will grow further," he added.