FYI: You just entered the VAT era
The direct impact of the UAE's new tax regime will mainly be felt in the prices of groceries, utility bills, petrol and private transport.
Dubai - UAE's tax rate one of the lowest in the world
Come 7am today, everything will be the same but certain products and services will become five per cent costlier under the value added tax (VAT) regime.
As part of a GCC agreement, the UAE will impose five per cent VAT on a host of goods and services. Known as a consumer tax, VAT will be levied on certain household items, fees and charges of banking and financial services, utility bills, automobiles, telecom products, electronics, certain segments of education, retail among others.
One of the lowest in the world, the five per cent VAT will initially be implemented in the UAE and Saudi Arabia. Then other Gulf countries will follow later. Globally, VAT is adopted by 150 countries, contributing 20 per cent of the worldwide tax revenues. Average standard rate in European Union - excluding new members - is almost 20 per cent. Denmark, Morocco, Tunisia, Algeria, Jordan and Pakistan have on one of the highest VAT rates at 25 per cent, 20 per cent, 18 per cent, 17 per cent, 16 per cent and 15 per cent. Among other countries, South Africa has levied VAT at 14 per cent, Lebanon at 10 per cent, Mauritania at 14 per cent, and New Zealand at 12.5 per cent.
In the UAE, the new tax regime's direct impact will mainly be felt in the prices of groceries, utility bills, petrol and private transport, which will increase by five per cent. However, some categories such as school tuition fees, books, healthcare services, public transport, international travel, life insurance and few others have been spared from the VAT.
According to Dr Sanjay Modak, visiting professor of economics at the Rochester Institute of Technology, 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 Modak.
The UAE attracts millions of tourists every year and they will also be subject to five per cent tax. Though tourists get refund for their purchases in many countries, but authorities in the UAE are working on a programme to put in place the structure for refunds.
Khalid Al Bustani, director-general of the Federal Tax Authority, earlier 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 soon.
Similarly, gold jewellery will also attract five per cent tax on the purchase of the whole piece rather than on the making charges.
Thomas Vanhee, founding partner, Aurifer Middle East Tax, noted that under the new system, residents and tourists buying gold jewellery will have to pay five 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.
With regard to educator sector, Surandar Jesrani, partner and CEO, Morison MJS, says parents will need to shell out more for uniforms and school transportation but tuition fees will be exempt from the tax.