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"In such a scenario, food prices will rise, pushing up the cost of living," the experts said.
While the final list of VAT-exempt items is not yet announced, the ministry of finance has indicated that most food items will fall under the five per cent rate. This means, contrary to expectations of an exemption, basic goods will fall under the five per cent VAT rate along with imported goods and services, utility bills as well as mobile telephone and internet bills.
Khalid Al Bustani, the newly appointed director general of the country's Federal Tax Authority, said the UAE would implement a five per cent GCC-wide VAT on January 1, 2018, and an excise tariff by the fourth quarter of 2017. The final VAT law is expected to be unveiled within this quarter.
"VAT applicability on food products will determine if the cost of food items will go up starting January 1, 2018, the 'go live' date for the path-breaking tax reform," said Surandar Jesrani, partner & CEO, Morison MJS Tax Consultancy.
"We need to wait for the final VAT law and executive regulation to see the applicability, but there is a great possibility of basic food products being treated as standard-rated supply," said Jesrani.
Thomas Vanhee, founding partner, Aurifer Middle East Tax, said the UAE and Saudi Arabia would not be zero-rating basic food items. However, in Saudi Arabia the government will compensate for the higher prices by setting up citizens' accounts, through which nationals can receive subsidies.
"This means that both in the UAE and Saudi Arabia food items will be subject to the standard rate of five per cent. In other words, the total cost of groceries will go up and thus also inflation for the UAE residents. This obviously adds to a range of other services and goods for which the price will go up, assuming that business will want to keep the same margin and pass the additional cost to its customers," said Vanhee.
"The extent to which food prices will escalate will depend upon the bucket under which food items will fall into - whether exempt, zero-rated or standard-rated. Prices for basic food products will go up if those are to be treated as standard rate. However, prices shouldn't go up if they are to be treated as zero-rated," said Jesrani.
In case of exempt, prices might go up since businesses will be unable to deduct the input VAT for exempt business, tax experts explained. In case food products are to be taxed at standard rate of five per cent, then it will be easy for businesses dealing in those products to manage and administer their system because they don't have to manage the same system for standard and exempt products and it will be simple to set up the system.
This also helps in avoiding any challenges in definition of basic products and ultimately helps to avoid disputes and litigations around the definition. For example, taxability is different if items are made mostly out of chocolate (like chocolate bars) or if chocolate only used as a flavouring (like brownie). Similarly, if Jaffa cakes are chocolate biscuits or more of cakes as both have different taxability. "There are numerous other cases on these lines, so considering these and in order to keep it simple, all food products might be treated at standard rated. We have to wait for final VAT law and regulation to have final treatment," Jesrani said.
Vanhee said in most mature VAT jurisdictions around the world, like in Europe where VAT originates from, certain types of food are subject to a lower rate or to a zero rate.
"The broader grocery shops, supermarkets and the retail sector will be severely impacted by the implementation of VAT, since it is not just limited to charging VAT or not. Amongst others their point of sale systems and the broader enterprise resource planning systems have to be adapted," said Vanhee.
"By subjecting everything to the standard rate, you will certainly avoid anecdotal discussions such as does the Kinder Egg made out of chocolate with a toy inside constitute chocolate or a toy? Or whether butter and margarine should be subject to the same rate? These anecdotal discussions have led to court cases even," said Vanhee.
Along with VAT, the recently announced excise - which is imposed on certain goods including tobacco, alcohol, confectionery, soft drinks and fast food - is expected to increase overall consumer prices by an average one-off hike of 1.4 per cent from 2018, according to government officials. Some analysts estimate that VAT could add about 2.7 to 3.7 percentage points to headline inflation in the first year of introduction.
Tax consultants said that on the basis of the latest clarification from the Federal Tax Authority, a zero rate of VAT will be applied only to healthcare and education services. Both services were previously expected to be exempt from VAT, meaning that input VAT would have been a cost to businesses making such services.
The final VAT law and executive regulations, which are expected to be announced soon, will specify the applicability of VAT to various basic products, said Jesrani.
issacjohn@khaleejtimes.com
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