3pc VAT will not stoke inflation, says Dubai Customs

DUBAI — A three per cent Value Added Tax (VAT), which is expected to replace customs duties by early next year, will not have any major impact on UAE's runaway inflation currently skirting an all-time high of 12 per cent.

By Issac John (Deputy Business Editor)

Published: Tue 3 Jun 2008, 11:56 PM

Last updated: Sun 5 Apr 2015, 1:06 PM

Allaying widespread concern that VAT would aggravate inflationary pressures, Dubai Customs Director-General Ahmad Butti Ahmad said revenues from the new VAT system would match that from customs duties which are to be phased out when the new taxation is implemented.

"Therefore, the VAT system would not have any negative effect on our inflation rates," Butti said. The removal of customs duties is inevitable under free trade agreements which the UAE is entering into with other countries.

Butti said all GCC countries would be implementing the VAT system eventually. He also confirmed the readiness of Dubai Customs to implement this system as soon as it is approved, because Dubai has already initiated a proper methodology in 2006 for its implementation. He said Federal lawmakers are currently drafting legislation for VAT's implementation early next year. All the details and the date of introducing the new taxation system are yet to be finalised at the federal level.

Defending VAT as the best taxation system in the world, Butti said the system would bring a lot of benefits to the UAE as it is highly transparent and accurate.

"It will not have any negative effect on foreign investments because foreigners are used to such taxation systems and they prefer to operate under the umbrella of this system instead of being subject to unclear taxes."

Customs duties are levied on importers at the point of entry of the merchandise while VAT is levied from consumers at the point of sales. According to customs officials, as providers of the services and the goods will be free from customs duties, they will have to pass the benefits to consumers.

“Suppliers will not be paying customs duty so they should not need to increase their prices. Therefore, the introduction of VAT would not hit consumers,” an official source said. In terms of the cost to consumers, a three per cent VAT will be equal to five per cent customs duty, he explained.

One source said healthcare and education would be except from VAT, while the tax threshold would be sufficiently high that small businesses. Dubai Customs has previously said small businesses with revenues under $1 million and companies within the health and education sectors could be exempt.

Last month, Dubai Customs Executive Director Abdul Rahman Al Saleh dismissed International Monetary Fund’s views that implementing VAT would fuel inflation in the UAE and said VAT would have significant positive impact on the economy of the UAE.

Reacting to the observations made by Mohsin Khan, IMF regional director for the Middle East, about the chances of inflation surging in the UAE and the GCC region by two per cent in the wake of VAT introduction Saleh said his statements were incompatible with an earlier IMF report that praised VAT and stressed the need for an immediate implementation to strengthen the UAE economy.

He has said the introduction of VAT would strengthen the economy and raise living standards. The UAE will have the infrastructure in place for VAT system by the end of this year.

An IMF study called for implementation of the new tax system in two stages. The report recommended levying of tax on selected goods like tobacco, cars and electronic items and the removal of customs duty on all imports, with the tax being collected directly from the distributors, agents and wholesalers.

At a later stage, this process will be further modified to ensure that the tax is applied only at the point where the good is actually sold to the customer. It also talked about the inflation as result of implementing VAT.

Studies conducted by Dubai Customs indicated that the rise of inflation rate in the UAE would not exceed a one-year-diminishable half (0.5) per cent when VAT is introduced, mainly because VAT will be a blanket between three and five per cent.

“As VAT is going to replace the current customs duties amounting to five per cent, it will ensure price stability and help check further rise in inflation.

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