UAE retail sales to see upswing before VAT

dubai - Levy will not have long-term impact on retail sales

As the date for the implementation of the Value Added Tax (VAT) in the UAE approaches, experts have stated that retail spending in the last quarter of the year will see an upswing, before taking a slight hit in the first few months of the new year.

However, they are confident that the impact on the retail segment will not be very long-lasting, as consumers slowly adjust to the new tax.

"We would expect there to be a surge in discretionary spending in Q4 as consumers - with encouragement from retailers - will bring forward purchases to 'beat the VAT sales'.  This will then be followed by a slump in such spending in Q1, 2018. Other than this timing effect, once pricing settles at a five per cent VAT, it is not likely to have any enduring impact," said David Stevens, VAT implementation leader at EY.

Atik Munshi, senior partner at Crowe Horwath - UAE, said there wouldn't be a major impact on retail spending in view of VAT as the rate is not very high.

"Though the end impact on consumer price will be higher than five per cent, as the effect of margins of the intermediaries would also impact the final price. Due to the introduction of VAT, the economy may witness some inflation. A little inflation, in my view, might be good for the economy."
Justin Whitehouse, Middle East indirect tax leader at Deloitte, explained that the real impact of the VAT will be based on any associated absorption of the VAT cost by retailers.

"The VAT system is broad based and there are no significant reliefs that would affect normal retail activity. The reliefs are more focused around other spending such as healthcare and education. The advantage of such a broad base is the UAE can afford a very low VAT rate and it makes it simpler for retailers to implement," he said.

Smaller retail firms generating less than Dh187,500 will be exempt from tax. When it comes to the different types of retail items that will be exempt from the tax, experts revealed that the supply of some financial services, residential properties, bare land and local passenger transport are exempt. Other 'zero rated' items also include healthcare, education and international travel. Apart from the exempted and zero-rated items, VAT will be applicable on nearly all sales and deemed sales.

"VAT should be charged on all retail transactions, irrespective of cost. In this regard, we can expect to see on our receipts an extra row or column detailing the taxable amount, whether it is from the grocery store, the fashion outlet or the electronics retailer," explains Danyal Tirmazi, engagement manager at Sunstream Research & Consulting.

Looking at the amount of revenue that will be generated through the retail sector by the implementation of the VAT, Munshi noted that the initial estimate at the time of introduction was an addition of around Dh12 billion to the exchequer, though the bifurcation of this amount has not been provided.

"Retail is a significant contributor and hence a major chunk of the collection will come from retail. If we expect to repeat the Singapore example, then actual collections might exceed the estimate of Dh12 billion," he said.

Tirmazi, however, has a more cautious estimate, saying: "Sources state that the UAE retail sector generated just over Dh205 billion last year. This suggests 16 per cent contribution to the country's GDP if we use the IMF estimate of Dh1.3 trillion for 2016 - hence significant. Furthermore, expected annual growth in the sector is reported to be six per cent. On this basis, taking exemptions into consideration, we expect VAT revenue from retail to be somewhere between Dh9.5 to Dh10 billion."

- rohma@khaleejtimes.com