Why did the UAE introduce VAT, its first indirect tax?
A country that hasn’t had any tax since its inception, the UAE introduced VAT in 2018 to increase its revenue as oil prices had fallen drastically.
The VAT of 5 percent may not seem much in the face of it, especially when you compare it to other countries that have an average of 15-20%. However, the major markets in Dubai such as commodities and tourism have been drastically affected by the VAT implementation as Dubai has lost its competitiveness and becomes more expensive as a shopping destination. This, of course, has a multiplier effect across different industries and especially the real estate industry being the main growth factor for Dubai.
When you buy an off-plan property, you need not pay tax on Dubai real estate to the developer. Therefore, the transactions on off-plan properties are considered as a zero-rated tax.
The exception of VAT is also applicable on the secondary market at the time of sale but buyers are being charged VAT on government fees and commission relating to these purchases. The buyers should pay tax on Dubai real estate only in the case of lease management services or other management services or if they own hotel assets.
Commercial property buyers are being charged on both off plan and secondary market units in Dubai real estate. This has a drastic impact on commercial assets as 5% VAT is a substantial extra cost to pay.
The Positive impact of VAT in Dubai
1. Economic growth
The excess revenue in the form of tax is helping UAE in increasing their economy & infrastructure and allocating the money for the benefit of the public. This also is helping UAE in increasing their standards worldwide and gearing up for the expo 2020.
The tax system induced job opportunities for the accounting graduates and experts. Many of the businessmen are requiring assistance from the chartered accountants to get their VAT returns done and also to look at the company’s economy. As per the reports, after the introduction of VAT, the expected salaries of the employees in this industry have increased.
3. Growth in consultancies
The firms which offer taxation and accounting services for relatively smaller companies have enjoyed a higher demand after the introduction of VAT.
4. Transparent Tax System
The tax system in UAE is fair. There is only a single standard rate of tax. The taxable and nontaxable goods are being clearly defined. There is no discrepancy between what is said and what is being done.
The Negative impacts VAT in Dubai
1. Increase cost and lack of competitiveness
An increase in the cost of supply and therefore making it more expensive for businesses and thereby less competitive.
2. Exodus of great talent
Even though the VAT being levied is small, the middle class and poor class of the country are affected by the increased costs and it is affecting their monthly budget on a great extent. This has greater ramifications for Dubai as the majority of the population is an expat community, this is leading to an exodus of great talent leaving the Emirates.
3. Lack of clarity
Small enterprise holders are not used to the new tax and its rules so there is still a lack of clarity on the charges being levied and for what products and services.
4. Lack of awareness and education
Most of the citizens have no idea of how to check the TRN status or the registration status of VAT.
In Summary, VAT has created greater revenues for the government to allocate on its infrastructure spending, which should provide long-term benefits. However, it has also created a lot of short-term pain with businesses as their costs have gone up. Also with the low to middle-class population, their cost of living goes up, which is leading to an exodus of the expat population. This can have long-term ramification as this talented skill leaves the country so it remains to be seen if VAT has a positive impact on the economy in the long term.