Decades of tax-free living has come to an end across the GCC with the respective countries, including the UAE, introducing value-added tax (VAT). The news caused ripples of anxiety among the Dubai population when it was announced last year and it’s now in force.
Set at five percent, the new levy in the UAE is much lower than in the 150 countries that were already implementing VAT (in the United Kingdom, for example, it stands at 20 percent).
To help us all know where we stand the Federal Tax Authority (FTA) has put together a list of frequently asked questions and answers to help everyone understand how VAT works.
What is VAT?
Value-added tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.
VAT is one of the most common types of consumption tax found around the world. More than 150 countries have implemented VAT (or its equivalent, goods and services tax), including all 29 European Union members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each step of the “supply chain”. Ultimately consumers generally bear the VAT cost while businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
Why is the UAE implementing it now?
The government provides citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from the government budgets. VAT will provide the UAE with a new source of income which will contribute to the continued provision of high-quality public services into the future. It will also help the government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.
What will VAT be applied to?
VAT will apply to the majority of transactions of goods and services unless specifically exempted or excepted by law. All food and beverages will be subject to VAT.
What won’t VAT be applied to?
Private and public school education (but not higher education) and related goods and services provided by education institutions. However, uniforms will be eligible for VAT. When it comes to healthcare, preventative services are zero rated (including vaccinations and dental services), but if you’re having cosmetic and elective treatments, you’ll pay VAT. Public transport (and internal flights) are exempt as are international transportation of people and goods. The first sale or rent of a residential building after completion is zero rated and interest on loans, credit cards and finance is exempt. If you buy a lot of precious metals you should be looking for 99 percent pure gold, silver and platinum, as they will be zero rated.
Will it affect my cost of living?
In short, yes. The government accepts the cost of living is likely to increase slightly.
Can I see how much I’m being charged?
When you get a receipt for your groceries or a bill at a restaurant or bar, there should now be an entry before the final total clearly stating the five percent VAT charge.
What if I’m being overcharged?
Officials have said they will be monitoring price increases and fines for overcharged VAT start at Dh500 and can rise to Dh15,000 for repeat offenders. If you feel you’ve been overcharged, you can call the Federal Consumer Protection Office on 600 522 225.
Does this mean income tax is on its way?
There have been rumours that the next step after VAT would be the introduction of income tax. The FTA says: “As per global best practice, the UAE is exploring other tax options as well. However, these are still being analysed and it is unlikely that they will be introduced in the near future. The UAE is not currently considering personal income taxes, however.”
What the experts think...
When VAT was first announced, we asked experts Jason Cook, aka The Financial guru (www.financial-advice.ae), Martin Amison, a partner at international law firm Trowers & Hamlins (www.trowers.com), and Martin Kubler, CEO of business consultancy sps:affinity (www.spsaffinity.com) for their views and advice. Here’s what they had to say.
What are the upsides to introducing VAT in the UAE?
Cook: “VAT will provide the UAE with a new source of income, which will contribute to the quality of our public services now and into the future, which is great news for us all. It will also help the government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue, creating a more stable economy for us all to enjoy and prosper. Even at a low rate, VAT has the potential to raise huge amounts of revenue. And as the UAE is one of the most globally ambitious countries, with trillions of dirhams of infrastructure projects scheduled in the next ten to 25 years, creation of a stable revenue stream is good practice by the government.”
What could be the downsides?
Amison: “VAT does not discriminate between wealthy or poor. The end purchaser of goods or services will pay unless the goods or services are exempt or zero-rated. However, prices of goods or services that are exempt are likely to increase, too, because the suppliers of these cannot offset the increase in the costs they have that include VAT. A simple example to illustrate the point is: imagine a shop that primarily sells goods that are exempt from VAT. The shop cannot charge VAT on the exempt items but will still have to pay VAT on many of its costs, such as power, water, cleaning contractors, equipment purchases etc.
So how does the new tax affect the cost of living in the UAE?
Cook: “VAT is not going to break your bank. Various studies and surveys over the years in multiple countries have concluded that there was no acceleration in the rate of price rises attributable to VAT.”
The information in this feature is provided for information purposes only. It is not intended to be and does not consitute financial advice, is general in nature and not specific to you. Before making financial decisions, you should seek the advice of a number of experts and undertake your own due diligence. You are responsible for your own financial research and decisions. For more information on VAT, check out www.tax.gov.ae and www.mof.gov.ae.