VAT in UAE: What will be taxed and exempted

School fees will be spared, but residents should keep an eye on their budgets as water, power, food and jewellery are expected to come under Value Added Tax (VAT)  from next year. Experts, however, believe that it won't break the bank for most people.
"Most food staples have a price elasticity of demand ranging from 0.20 to 0.80 in demand. This means that staple food items are generally price inelastic. So when you regularly purchase an item for Dh20 and now see it priced at Dh21, it is unlikely that consumers will think twice about buying it especially considering that the bulk of food items in the UAE are imported and prices fluctuate regularly," says Dr Sanjay Modak, Visiting Professor of Economics at the Rochester Institute of Technology. He says it is important to go the European way and include the VAT in the price you see on the shelves and not add it at checkout as it's done in the US.
A VAT rate of 5% for food is still low compared to other countries. In Europe, rates range from 15% in Luxembourg to 25% in Croatia. Japan has a consumption tax of 5% and Singapore has a GST of 7%. Canada has  5%. Hong Kong still remains tax free for all consumption.
Under the new system, residents and tourists buying gold jewellery will have to pay 5 per cent tax on the whole piece rather than on the making charges. This means, a buyer will have to shell out Dh50 more while purchasing Dh1,000 worth of jewellery, according to Thomas Vanhee, founding partner, Aurifer Middle East Tax.
Meanwhile, the World Gold Council released a report which says jewellery sales in the country dropped 10 per cent during the third quarter to seven tons. But sales generally pick up in the last quarter as tourist arrivals increase, so it's early to ring the alarm bells.
Khalid Al Bustani, director general of Federal Tax Authority, on Wednesday, said tourists  would get refunds on their purchases at the airport while returning to their countries. He said the authority is working with the parties involved and is expected to roll out the plan before January 2018.
Parents will need to shell out more for school uniforms for their kids but school fees will be exempt from the tax. Higher education institutes that are more than 50 per cent funded by the government, will not be charged VAT; the rest will come into the fold.
Surandar Jesrani, partner and CEO, Morison MJS, says education services will be exempt if run by a recognised institution and offers a recognised curriculum.
 "In the case of higher education institutions, it should either be owned by the federal or local government, or receive more than 50 per cent of its annual funding directly from the Federal or local government," he said.
"We expect that tuition fees, study material (books), medical fees, registration fees, admission fees and exam fees will be 0 per cent," he said.
Another major development is that free zone companies purchasing goods and services outside the zone will be subject to VAT. This means potentially high VAT pre-financing for companies in Jebel Ali Free Zone and Dubai Airport Free Zone.

- with inputs from Suneeti Ahuja-Kohli