From today, the way the UAE businesses conduct their day-to-day operations and the spending habits of residents will see a major shift as the UAE moves away from tax-free nation by levying a five per cent Value-Added Tax (VAT) on goods and services.
With VAT imposed on most of goods and services, some have been exempted and zero-rated, the government is projected to collect Dh12 billion in 2018 from the new tax and Dh20 billion a year later as more and more companies come into the tax fray.
Industry analysts and executives believe that VAT - which is the lowest in the world - will bring transparency and give credibility to UAE corporates. While impact on consumers' spending trends will be very minimal because five per cent VAT will translate into around two per cent in terms of inflation on the consumers as some of it will be absorbed by the companies as well. Analysts believe that this sudden reaction is normal among the residents ahead of the implementation of VAT but people will get used to the new tax regime with the passage of time.
According to economists, it is estimated that inflation will increase in the range of 1.5 per cent to 2.5 per cent due to VAT as some of it will be absorbed by the corporates in the supply-chain mechanism.
"Most of the world has implemented VAT. It will bring in confidence into the UAE's system of accounting and transparency. It will improve credibility of the country and more investors are likely to come in," says GR Mehta, managing director, Kaanee American International Tobacco; and former chairman of The Institute of Chartered Accountants of India (Dubai Chapter).
With around 350,000 companies projected to register for the Tax Registration Number, the UAE's Federal Tax Authority has set Dh375,000 as the threshold to register for TRN. Following the registration deadline of December 4, 2017 for registration, the Federal Tax Authority has been issuing provisional TRN to the companies.
Since five per cent VAT is among the lowest rates in the world, some of the countries have imposed the tax as high as 25 per cent in Denmark, 20 per cent in Morocco and 18 per cent in Tunisia.
Earlier, the UAE levied 50 per cent excise tax on purchase of carbonated and energy drinks and 100 per cent on tobacco products from October 1, 2017.
These levies will reduce the government's dependence on petrodollars and diversify its resources to invest in further develop infrastructure such as public parks, hospitals, roads and transport etc.
Naveen Sharma, chairman, ICAI (Dubai Chapter), believes that VAT will bring in confidence of the outside world into the UAE's system of accounting and transparency.
"If we are using Dubai roads, public parks and infrastructure, I don't think paying 2 or 2.5 per cent more as inflation is bad as we enjoy the best quality lifestyle that we have now," he said, adding that Dh12 billion is a lot which the government will collect from VAT and pump it into the development of infrastructure. This will double the rate of economic growth that has been seen in the past, Sharma said.
According to a report by the Institute of Chartered Accountants in England and Wales (ICAEW) and Oxford Economics, the UAE will record an accelerated growth in 2018 to 3.6 per cent from 1.7 per cent in 2017. The momentum will continue with GDP growing at 3.6 per cent in 2019.
In order to make it easier for the companies to obtain their TRN, the Federal Tax Authority recently announced provisional tax registration numbers to companies and individuals meeting the threshold.