VAT levy to impact luxury goods, cars the most

dubai - UAE is likely to generate Dh10b to Dh12b in the first year of implementing VAT

A vast majority of financial and investment professionals who took part in a survey believe that the introduction of value added tax (VAT) by the UAE in 2018 will lead to higher inflation rates.

The survey by CFA Society Emirates, an association for financial and investment professionals in the UAE, revealed that demand for luxury goods will be affected the most by additional VAT costs, followed by cars, tobacco and real estate.

However, CFA professionals saw healthcare as the sector which will be least impacted by the additional VAT costs.

The UAE, which is set to become the first country to introduce VAT by 2018, is expected to generate around Dh10 billion to Dh12 billion as a result of introducing VAT in the first year of its implementation. In this context, 66 per cent of respondents said the GCC countries would be able to efficiently manage the extra revenues received from VAT, CFA Society said in a statement.

While 82 per cent of the respondents said that VAT would lead to higher inflation rates, 80 per cent said they would consider moving abroad if an income tax were to be introduced as 59 per cent of them revealed that the GCC's tax-free environment was a key factor in their decision to reside here.

On the corporate level, employers will not consider relocating if corporate tax is introduced as per 59 per cent of the respondents, although 41 per cent of them believe otherwise.

While 79 per cent of respondents felt that the car and automobile industry would be affected the most by the implementation of VAT, 77 per cent believed that luxury goods will feel the impact more than other industries.

More than half of the respondents were of the opinion that the number of expats living in the region will stay the same once VAT is applied, 47 per cent thought that the number of expats will decrease.

Many respondents believe that forms of indirect taxation already exist; 86 per cent cited hotel taxes as an example, 79 per cent affirmed road tolls were another, while 60 per cent identified parking and car registration charges as one.

According to the survey, consumers in the region will have to bear the additional costs VAT will introduce, instead of retailers, as it is ultimately paid by the end user.

"CFA professionals see VAT as a paradigm-shifting reform in the GCC's fiscal policy and are unanimous that it will lead to higher inflation," said Amer Khansaheb, president of CFA Society Emirates.

He argued that although inflation rates are also heavily influenced by interest rates and economic growth, the immediate effects will pose challenges to both consumers and businesses.

"The additional costs will only be marginally felt by the day-to-day consumer, but it will have a bigger effect on higher budget purchases. Around 73 per cent of the professionals surveyed said consumer goods are more expensive in the GCC than their home country; hence VAT will add an additional burden to consumers, leading to higher prices and resulting in inflation," said Khansaheb.

He said the short-term impact would be offset by the long-term benefit VAT would bring to the regional economies.

"There is an urgent requirement to diversify government revenues, which are currently still largely dependent on income from oil and gas, and VAT is a measure that will allow more stability given that the outlook for crude prices remains volatile," said Khansaheb.

"Additionally, VAT would encourage more responsible consumer spending patterns and prices would have to be reduced in order for demand to match this trend; which would eventually lead to a decrease in inflation rates," he said.

- issacjohn@khaleejtimes.com